How to approach an older investor about buying their properties with credibility

Question

One of the investors in my local REIA is looking to retire and is looking to sell  couple of neighboring four-plexes in a decent area of town (across the street from an elementary school) sometime next year.  I am just starting out and wanted to focus on single-family homes because it is still possible to get them at a good discount here and the rental market is pretty tight, but these buildings piqued my interest.

The buildings are well-kept and on adjacent lots, bringing in $2050 and $2150 gross monthly, respectively.  They've owned one building since 1977 and the other since 1994. Their tenants seem to stay quite a while - 7 years on average and those people are in month-to-month tenancies.  The only expenses  she said they had are :

"water ($120 - $160 monthly per building),  trash (shared dumpster), insurance,taxes, yard clean-up and maintenance as needed. The  back-flow preventers have been installed on each property are require an  annual inspection which costs $50 each."

Of course I would like to to open up some discussion/negotiations with her but am not sure where to start. She hasn't given me an asking price yet - but I still need to figure out on my end the most I would be willing to pay.  What do I need to ask for?  I am assuming I will need Schedule E's, rent rolls, utility bills etc. - but since I am new to town and look pretty young people seem to be skeptical up front when I start digging for information.  I am by far one of the youngest members of my REIA but our family is financially stable and has $$ to invest!!

Will Barnard · Answer

AJ, happy to help.

You are right, most comps are likely going to show that others have paid more. The wise and astute investor looks for and earns through hard work, a great deal. Not having agent commissions will help, one buyer for both properties will help, and ease of not having to do with buyers and agents is yet another avenue to use in negotiations for a good deal.

Ask her what her number is, then go from there. No matter what number she comes out with, even if you love it, act as if she just swung a bat at your head.

With rents in the $700 per door zone, you do not have to hit the 2% mark to get a good deal and retain real cash flow. Remember, this is just a guideline and not a hard fast rule. As an example, we have properties here in CA that if you could buy at a 1.4% clip, you can have cash flow.

Get the gross rent numbers for all the units and get back to us for further discussion.

AJ Romero · Answer

Will,

Thank you very much for the thorough response.  I appreciate the pep-talk ;)

As for the property, the city I live in is predominantly blue collar, working-class. Population is just about 100,000,  median household income is a little over $30,000. From this I expect that the median rent most people are able to afford is around $750 - $800 per month.  The rents charged are definitely at the lower end of the spectrum but are typical of 2/1 apartments.  The neighborhood where the buildings are located is nothing special but is one of the more desired places to live in town.

We have our next REIA meeting next week - perhaps I could bring up purchasing both. The price suggested by the 2% rule seems a little low just based on what I see 4-plexes selling for but I guess you never know given the fact that the buildings don't have mortgages and the lady selling does not use real estate agents. Perhaps I can appeal to her apparent desire to retire quickly.

Thanks again

AJ

Will Barnard · Answer

Take your age out of the thought process, it has nothing to do with the negotiations or your search for information. I thought the very same thing when I was young and little did I know, it actually worked to my advantage as people (particularly those up in age) were very impressed with how I ran my business and carried myself so well being so young.

Now, on to your question . . Approach it like any other opportunity and negotiation. Ask what the asking price is and ask for any and all documentation regarding the income, expenses, and tenants. Believe nothing, verify everything with due diligence.

You should develop (if you have not already) an astute understanding of operating expenses, capital expenses, and have a good understanding of the 50% rule, the 2% rule and other useful "guidelines" (not end all be all rules).

From the numbers you posted, it looks like each door earns slightly north of $500 monthly on average. I do not know your area well enough to comment on your market conditions but from the rental amount, it does not sound like a middle class or better area based solely on the price point. Based on the 2% rule, each building should be worth approx. $102,500 and $107,500 respectively. This of course does not factor in any deferred maintenance which any amounts needed should be reduced from the price. Now, 2% deals are not easily completed so you must work hard for them through highly motivated sellers, good negotiating skills, and hard work and due diligence. A negotiating ploy in this case may be the fact that you are willing to take them both of her hands, she would not have to go through the trouble and effort to market them for sale, and that RE commissions could be saved. These are just a few items that you can use in your negotiations. Find out what this investor needs and what issues or problems she may be having and attempt to solve such problems through the deal.