How to Price Wholesale Deals To End Buyers

[Brian Bagnall]

Hey all!

I'm picking up what I believe to be some pretty turnkey rental deals BUT I'm not quite sure how to price them to the end buyer.

Here's one of my deals:
4 Unit Multifamily in Ohio

CURRENT RENTS OF $1150 A MONTH ($1500 when the other apartment is rented out)

2 – 2br efficiency units (1 rented at $350/month)
2 – 1br full units (both rented at $400/month)
The unrented 2br efficiency needs a little work. (around $1k)
Month-to-month leases.
Tenants pay their own utilities.
Taxes are $1826 a year

(not trying to promote this deal... just posting numbers to get feedback).

I have it under contract for $15k. I was told that a 20% Gross ROI is a good number to shoot for where investors will pick it up fast but I'm not sure. Trulia is showing a value of $43,562. A 20% Gross ROI to the end buyer would mean selling it for $69k to the end buyer (at the current rents).

Any help would be greatly appreciated! :)

[Ronald H.]

Hi, Brian!

Have not did a deal yet, but lots of education. My message is a bit lengthy, but intended to help as well as hopefully get some feedback and to learn more.

Can you determine from the previous owner what the avg occupancy rate has been for the last two years? If you can verify that he is not padding this, that will be good for you. If he says 2 % and the avg around the area, is really 5% and your new buyer knows this, he'll question you.

There are 365 days in a year. If the apartment that needs the 1K in work has been vacant for four months and it should have been earning $350/Mo then $350 x 12 mos=$4,200/Yr $4,200/365 = $11,50/Day $11.50x120days=$1,380 in lost revenue from vacancies.

Is he going to manage it himself? He still needs to factor it in, so if he needs to resell he can demonstrate it to others, and besides that he wants to get paid for his time, doesn't he? Can someone find a Prop Mgmt company to manage a property for others, and for 10% of the N.O.I.? I don't know to be precise, so I used 10% below. If the Prop Mgmt companies are charging 20% of the Gross NOI, just change the formula to reflect that. F

Deduct your Taxes. I used $2,000 below? Too high? Just change it.

Insurance, I used $2,000 to simplify

Accounting and Legal to have you accountant keep your books. Can we peg that at $400/yr. Probably a bit conservative, but how am I doing?.

Office Supplies. Figure we got tenant's who stay with us and we can prove it, so lots of collection letters and house rule docs don't have to be printed. We'll peg that at a conservative $150.00/Yr

Does this home require a dumpster? Don't forget that. If it does, include it. I omitted it below.

Are the sewer charges included in the Taxes? If not, include them. Same with water.

Snow removal? Not included here, but it should be, if it is Ohio.

There will not be Janitorial, because the tenant's all clean their own bathrooms, but who is going to clean the common areas? If Proper Mgmt does it, just exclude this. I assume they do it below.

I am betting that any Investor who is wise is going to factor in a % that goes into an emergency repair account, just in case they missed a defect on the furnace and it goes on the blink next week, or three months down the line. I used 2% of the NOI for an emergency account. I wait until I include the Prop Mgmt to figure this, and I wait to calculate the Prop Mgmt until I add all the other expenses first, to give the Prop Mgmt a figure

Total expenses that we know now are

1. Occupancy Rate/Vacancy Loss = $1,380

2. Taxes $2,000

3. Insurance $2,000

4. Accounting and Legal $400

5. Office Supplies $150

Total of above = $5,930.00

Gross Annual Income of $18,000 - $5,930 = $12,070.00 in NOI before Prop Mgmt and Repair Fund Acct

$12,070 - 10% or $1,207 to Prop Mgmt = $10,863/Yr

$10,863 - 2% for Emergency Repair Funds = $2,172 If you want to leave this to your buyer go ahead, but he should be factoring it. If you leave it to your buyer the deal looks sweeter. $10,863 - $2,172 = $8,691/yr is the figure you need to work with, unless you leave that Emergency Acct out.

If you decide to offer the property for double your money $16K, then your offering at 32K. Provided that you don't need to buy newspaper space.

Final NOI of $8,691/Yr divided by his initial Cash Investment of $32,000 = 27% ROI. If Property Mgmt will cost 20% then it will be 23% ROI

NOTE: I don't know what Property Mgmt companies are getting in that area, these days. I also don't know if they accept an NOI figure with a 2% Emergency Fund in it. They may want a bigger piece of the pie.

Correct me, if I my math here is off. I checked it.

Income will be the selling point, which I am sure you know.

I don't think Debt Service is factored in when calculating the ROI. It is used when determining the CAP Rate