Deal or No Deal ?

Question

This is my first Property Analysis so any suggestions would be welcomed.

I am using IPWare version 3.3.4 to do this. Anyone know of a good Property Analysis software pkg.

I have been speaking with a Seller who has a 16 unit property in a tough city. He told me that he wants to sell due to relocation. He would sell with an Assumable Mortgage of $663,000.00 and $330,000.00 in cash. He needs all the cash and will not take back a second.

Lot Size: 4,743 Sq. Ft.   
Lvg Space 18,000 Sq. Ft.

I do not know whether the Mortgage is a Qualifying or Non-qualifying assumable yet. $993,000.00 total of what he is proposing.

When I asked him what his Mortgage payment is he says it is $5,344.00 for a 30 Year amortized fixed loan at 6.51%. Yet, when I use a Mortgage calculator I get a payment of $4,195.00

Why the there such a difference? I don't know why this is! He has owned the property for 13 years.

I tried getting the Mortgage info from the towns website but it did not work due to Technical reasons.

He says the Loan is 10 years renewable, 8 years left. I have NO CLUE of what this means. I asked him and I still do not understand this.

Below, I have figured everything with his quoted Mortgage Payment of $5,344.00 per month.

Property Details as best as I have them.
109 Year old with updates but I have not seen. Four stories with an elevator. Age of elevator unknown.

12 - 2 bedroom apts  $785.00 monthly

02 - 1 bedroom apts  $685.00 monthly

02 Stores that pay gross monthly rent of $1,050.00 each.

Gross Annual Income $154,680.00 divided by sq. ft. for $19.33 per sq. ft.

Annual Taxes last year $10,620.60   Verified with the town. I asked if they would be going up this year but they did not tell me.

Annual Mortgage Payment $64,128.00

Mortgage and Tax Total of $74,748.60

Insurance of $7,200.00 for a PITI of $81,948.60

I figure Property Management in at 10% of Gross Income or $15,468.00  This is the figure I got from a couple of Real Estate websites.

$20,000.00 annually for 1st 2 yrs. for Reserves.

I am deducting for a Vacancy Rate of 5% for $7,860.00 annual loss.

Annual Water/Sewer of $10,800.00

Annual Trash Pickup $4,600.00  I am using an estimate from another 16 unit within 1 mile for this figure.

Annual Electric Service $5,400.00 or $450.00 per mo.

Annual Pest Control of $1,200.00

Legal and Accounting $2,150.00

Elevator Mantenance $1,200.00 verified but condition of elevator is unknown at this point.

Snow removal of sidewalk $725.00

Advertising for 21 days in the Newspapers $397.05   Verified.

Licenses for Rental Property $240.00

I am getting Total Annual Expenses of $81,800.05 or 52.88% of Total Gross Income.

OTHER FACTORS: Zillow shows this place as a 9 unit and has the value at $600,000. This is down $18,000.00 from last week. I do realize they are way off sometimes but they have the property info wrong.

The damn Tax Assessors want a had written note to give me the Assessed Value.

N.O.I. of 65,146.00.  For a 10% return, I figure the high end value of this property is worth $651,460.00 and not $993,000.00

I am not finding good Comparable of this size. I have to use much smaller properties.

Comparables bring up 
SOLD 7 Months ago:  Distance from Subject Property: 0.67 miles. Multi Family  9 br / 4 ba  /  4,448 sq. ft. $89/sq. ft.

SOLD 6 months ago  Distance from Subject Property is 0.88 miles.  8 br  /  4 ba  /  4,874 sqft  /  $64/sq. ft.  Multi-Family Home

SOLD 6 months ago. Distance from Subject Property: 1.05 miles
1/4 mile  8 br  /  4 ba  /  2,759 sq. ft.  /  $55/sq. ft.  5,000 sq. ft. lot Multi-Family Home

He needs the cash. I do not have it. Only ways to get it. Create note ans sell for cash?

Bring in partner?  I have not even formed a business yet, so this idea is probably out! I have no Track Record

Ronald H. · Answer

The property in question has Electric Heat and the Landlord says the Tenants pay for this.

I checked with the Electric Company and they said that Last Months Electric was $374.00 approximately.

The property in question also has No On-site parking which will probably add to the Vacancies. The Owner has been kind of shy on details and this was slightly annoying me.

The income from the property after expenses was not good at all.

As for the $330,000.00, I did not get that far. I stopped communications witht the Seller a while back.

Brian Levredge · Answer

To add to what the others have already said, this doesn't look like much of a deal at all.  You mention this building is in a 'tough' city.  Tough can go in either direction.  If the city is shedding jobs and is in a state of decline, you probably don't want to buy there since you will have a hard time holding down vacancies in the future and will have difficult time maintaining rents as things get more competitive.  However if the area has good job prospects and is in the process of being revitalized, but still has a ways to go, then it would be worth looking at more.

Having said that the numbers don't look good on this deal at all.   You didn't mention whether the units are all separately metered or if there are other landlord paid utilities, such as heat. Those could make your numbers much worse if not accounted for.  It may also be that the seller has an impound account for property taxes and insurance.  That would make his monthly payment higher than the numbers you arrived at.  If you haven't already, check out the various forums here.  If you are new to investing, I would humbly suggest going with a smaller investment for your first deal.

Eric Byrd · Answer

Ronald,

Uwe is right on... Plus, your NOI is lower than what you think. You also didn't mention how the $330k in cash would be paid/borrowed, or paid back...How would you plan on making money on this investment. For this kind of monetary investment, you can do a whole lot better...

Uwe S. · Answer

Hello Ronald,

1. The propertie mortgage payment rate is $5,344, because the mortgage was 13 years ago higher then $663k. If you assume the mortgage you assume this payment for the next 8 years (what you asked).
2. After your profit and loss description I believe this is not a good deal for you. The NOI is over $70k okay, but with the payments for the mortgage you receive only $8k yearly after this. Forget it please.

Unsurprisingly, the seller will sell these propertie.

-Uwe