First Deal Under Contract - Analyzing Schedule E During Diligence

[Peter Faulkner]

Hello Bigger Pockets Community!

I am excited to say that after a several years of studying, saving, and sitting on the sidelines (talking about real estate) I've actually done something and put my first deal under contract.

I'm hesitant to post too much detail because the deal involves several different parties whose privacy I respect - friends, business partners, and even the seller in this case.

Some high level information is that the deal involves more than one multi-family buildings in a market that is not quite at parity (re: pre-recession price levels ) as many of the other larger markets. This market has a lot of potential, however, and has an incredible amount of investment planned over the next several years.  We've just begun the due diligence period for this deal, but we think we're looking at a 6.5% Cap worst case scenario and maybe even as high as an 8% Cap - even after management, vacancy, maintenance & repairs. In my mind that's a pretty solid find in a market that appears to be about to turn...

I really have a multitude of questions, but I'll start with these two:

1. We've been given Schedule E's for the last two years. Prior to doing this deal, whenever I'd analyze a deal and put together a pro-forma, I always allocated some expense for vacancy, frequently 8%. However, now that I have the real revenue numbers (or at least as close as you can get to real) from the Schedule E, can I assume that the vacancy is already reflected in the revenue? I don't want to double count it....

2. In the same Schedule E, one of the columns doesn't have a property name - it says ADMINISTRATIVE. I just don't know what to make of that column. The seller entered expenses in that column that were not reflected in the other columns (i.e. other properties). Examples include "Auto & Travel", legal fees, supplies, etc. There is also depreciation, taxes, and insurance though in that column but they don't appear to be associated with a property. Since rental properties were a big part of his business, could he be taking depreciation on his truck? Insurance on his car? I just don't know what to make of that column... apologies if that's cryptic....

Look forward to your feedback!

Peter