All Forum Posts by: Avtandil G.

I've recently closed and rehabed a property in Columbus (and actively looking to get more, so if you have any leads, pls PM me ;) - but my question is about property management in the metro. There seems to be a number of solid PM companies around, RL, Panzera, etc. but most if not all have a rather high fee structure when compared to what I'm used to in CA. 

As a comparison, my PMs in Sac charge me 50% of 1st mo for placement (up to max 500), then 75/mo for management and 75 for lease reviewals. My PMs in Fresno charge me flat 8% of leased gross - no placement, no renewal, no vacancy charge (comes to ~80/mo average for PM). 

In Columbus, almost everyone wants to charge some startup fee, a full month for placement, a lease renewal fee and 8% to 10% of monthly fee. The end result is that monthly rents in Columbus average much less than in CA, yet absolute dollar amount for PMs is significantly higher. 

Example (all units in similar B type areas):

Sac (1st year with placement) - rent 2,100/mo, PM (with placement fee amortized) - $110/mo (or 5.2%)

Fresno (1st year with placement) - rent 1,200/mo, PM - $96/mo (or 8%)

Columbus (first year with placement) - rent 1,200/mo, PM (with placement fee and startup fee amortized) - $171/mo (or 14.2%)

Thoughts? 

thanks a lot folks - looking forward to connecting with many of you offline

@Joe Splitrock - financial definition of CAP rate and NOI is sort of well understood. it's just brokers have been dressing these numbers for so long, that not including management fees or vacancy has become an urban legend - i rationalize it this way - if we were talking about 500 unit complex rather than 6 unit, management fee will be a line item on the expense report and if it's not, ppl would just laugh. similarly, if owner is out of state, management will be a line item in the expenses - no way someone can self-manage a property out of state. Same goes for vacancy - it does not matter whether the property is 100% rented today - sooner or later you will have a turnover, and then it will take 30+ days to put a new tenant. On average, that happens every 24mo, so unit will not generate any income for you on average 15 days out of the year, or 5% vacancy. In some markets that's gonna be even higher

Of course I understand that the sellers will try to dress up the property, but what is the value that the brokers brings to the table if they do not try to bring their clients down to earth when a reasonable offer comes along? In particular, I've been seeing more and more MFRs going off market because they just didn't sell. And the number of properties overpriced by 30%+ is increasing

@Grant Rothenburger - not sure what you mean by 'adjust your methods'? do you mean accept lower cap? if so, i'd say it makes no sense for me personally (although it may for someone else) - if i were a pension fund, i'd be willing to accept a lower cap for A grade property since i'm just trying to preserve capital, but for me, lower cap means lower return and i'm in growth mode not preservation mode. 

@Joe Splitrock - the issue is not in the ability to calculate the property value at a specific cap rate - that's straightforward with current rent roll. the issue is that brokers calculate the price and corresponding cap off fudged income / expense reports - it does not really matter who fudges the numbers

just yesterday I was negotiating on a 6 unit in Fresno - the seller's broker is adverting it as 6.6% cap @ 460k on revenue of 41k. At 6.6% cap, this should be priced in the ~310k-330k range. so i request detailed income / expense - got it and discover that reported expense is only 25% of gross. there's no market in the world, where rental property expense is only 25% of gross (and if there's, nobody will ever sell such property), but the broker took the number 30.5k and arrived at the asking price using that reported NOI. After digging into the expense, I find out that there's no management fee, no property taxes and no vacancy allowance included. i make an offer at 325k and explain the rationale and the numbers, instead get back a 'we will not even talk about your offer' type of an answer.... And by the way, 325k turns out to be only 5.7% cap because owner eats cost of utilities.

@David Miller - thanks, but I do not do JVs at this point

@Russell Brazil - I do not follow your position about not needing these details. Example - some small unit MFRs are not individually metered for water, if I don't ask whether seller eats that cost or not, I'd end up with a fairly significant difference in actual expenses, particularly in states with high cost of water... In Fresno, for example, water expenses alone can be 15% of gross... Could you perhaps elaborate at how you arrive at the NOI from cost of building?

Hey folks

I've been looking to buy a couple small (6 to 10 units) MFR. I'n looking to get 7%-8% CAP c-o-c. Have been scouting usual sources like MLS, Loopnet, Marcus... Plenty of fish in metros I'm interested, advertised caps look good on surface, but...

Went through about 60 of these, requesting ttm income / expense report only to consistently discover fudging of numbers to arrive at a higher 'advertised' cap, basically dressing of numbers, including

* not including management expenses (oh, we don't include maintenance fees because they are specific to buyer)

* not including repairs / maintenance expenses (oh, seller just refurbished couple units 2 years ago)

* not including vacancy (oh, the complex is 100% occupied over the last 12mo)

* not including property taxes (oh, buyer can request tax abatement) 

you get the drift. and the conversations stop at the broker level after pointing out to all the gaps, most just stop responding - there are obviously reasonable / experienced folks who smirk and continue chatting but for every one of those, there are 50 who seem to just seem to either be completely incompetent or useless. and it seems to be getting worse vs ~5 years ago when i picked up my last MFR

any thoughts / advice how to deal with these types? is this a common situation for you as well? 

hey folks

i'm out of state and am looking to learn more about Pittsburgh with the purpose of buying a few small MFRs in the area (4 to 10 units). Would love to hear from local investors / RE agents / PMs about the state of the market and chat about the neighborhoods, what works / what does not etc.

Cheers

-A

I have 0 confidence in 'pro-forma' cap rates published by brokers / sellers - these are exaggerated in 99.999% by either fudging gross rents or fudging expenses, or both. Sac market is now as overheated as SF, so cap rates of 5% is a norm, and anything higher will likely require major capex

@Michael Guzik - thanks for your perspective and additional context. pinged you over PM, would love to carry conversation offline

Hey folks

I'm looking to network with local RE professionals - agents, wholesalers, contractors, property managers to better understand the Indy market. I'm looking to diversity out of CA real estate market into mid-west / south / south-east and am looking at Indy specifically. Would love to start building the local network with the goal of getting 10-12 buy-hold properties in the next 12mo

Sincerely

-A