All Forum Posts by: Anthony King

@Monica De Leon if you make your rent to yourself really high your cash flow would be so high you don't even need a HELOC.

@Stephen Densmore Gulf Shores is very seasonal. You'll be booked solid from mid May to Mid August and then reaching into your pocket to pay all the bills the rest of the year. I purchased a 4bed/3bath condo on little lagoon side in June 2021 and sold for a good profit earlier this month. Owned for a little over a year and basically broke even for the year. 20% PM kills your return. I killed it on the sale though.

@Jordi Valado I invest in Canton/Akron and have done a fair amount of research on Cleveland. Generally speaking, the feedback I have gotten from friends who live and invest there is cut the city in half and stay out of East Cleveland. I know others will say there are some decent areas scattered around the East side, but as an out of state investor, don't test your luck unless you really dig into researching specific neighborhoods and streets.

@Russell Brazil that's exactly the point I was trying to make and didn't know it. Ha. Do you have any recommendations on how else I can evaluate this deal? Like I said I feel there is a middle ground between actual and potential, but any number you pick between the two is a guess unless I use some other metric I'm overlooking right now. Any advice? And thanks for all the helpful comments you provide in these forums. They've been a great help to me, and many others I'm sure.

@Chris Webb yes I have heard of that and I remember that episode well with Dion McNeeley. I have used that in the properties I have managed myself, but this particular building would be managed by my property manager.

@Taylor L. You make great points and deep down I agree with all of it. On the flip side I know I can get over the $800 proforma numbers they provided. Also, I just did my first 1031 exchange on Aug 4th, so I have that 45 day deadline lingering over my head. I submitted an LOI for $1.2mil on the property I mentioned above and the sellers tried to negotiate, but I stuck with my $1.2 offer and they eventually accepted just yesterday. You are right, I feel like I am paying for all of the potential and they are benefiting from it. But in 2, 3, or 5 years I feel like I will be glad I bought this property. That's where I struggle. This is my first attempt in the commercial space. I currently own a few handfuls of 1-4 unit properties and am ready to make the jump to larger multifamily. Maybe I'm just too eager with this one, that's why I'm seeking advice. My emotions and gut keeping pulling me in opposite directions.

@Colleen F. I visited the property and saw all 4 vacant units and the answer given by their agent (sellers are in their 80's) is because they want to let the buyer fill the units themselves. They have owned the buildings since 1992. I'm guessing they are completely paid for and the owners just haven't had interest in pusshing rents higher. The current rents cover their expenses with a little left over according to the provided schedule E's. All 4 buildings are in excellent condition, the landscaping, the parking lot, everything really has been immaculately maintained. Like I said, they are older, have some tenants paying in the $300's and the highest being $526. My property manager who already manages 10 doors for me said he could get $895 on the vacant units in the condition they are in. If he get an average of $800-850 I like the deal, so $895 would be great.

Point being, I have verified it's potential rents, reassessed tax bill, accountednfor CapEx, Maint, vacancy, etc so the potential I can verify. What I struggle with is the asking price is on potential. Not actual performance. But to me it's worth more than a $500k asking price that the ACTUAL numbers would suggest. I just always hear on BP podcast, etc to use actual numbers in your underwriting, but never mention an instance like this.

I see a lot of multifamily listings that have the price set steictly on proforma numbers. I always hear to set your offer price based on actual rent rolls, T-12, current NOI. Cap Rate, etc. However, I come across a lot of properties that have had the same owner for 20+ years and they haven't raised the rents in a decade or more with 75% occupancy.

To be more specific, I found a 16-unit property asking $1.4mil, with avg actual rents at $429/month and the proforma rents from broker say $800/month. They also have 4 vacant units, for 75% occupancy. Using current/actual numbers I find a .5 DSCR, and a 2% cap rate.

How do you price a home like this when actual performance supports a much lower offer price, but the potential is there to support the asking price? Of course the owner holds all the cards so I don't see how offering half of asking helps me acquire one of these properties. Do you pay for potential? Do you meet them in the middle?

@Christian Clark the difference between your conservative estimate and the potential reality should not be the difference between a good deal and a negative cash flowing property. If you're that close, it's not a good deal. What I mean is, continue to be conservative in your estimates and then you will only be pleasantly surprised when your cash flow exceeds your estimates. Once you start being liberal with your estimations is when you get yourself in trouble after the sale is complete. There are always surprise expenses and fees after the deal is done because the tax man or some bureaucratic gov agency is always looking to take their cut. If you factor that possibility into your overestimations then a surprise "fee" from the "Gov Agency responsible for Equal Rights for Circus Clowns" shows up, you'll be prepared. I'd rather be surprised with more cash flow than with a tax bill, CapEx, or Maint expense that I failed to account for because I was too eager to force a deal.