All Forum Posts by: Brent Neuenschwander

I've recently purchased a 5 unit in an area that is mostly section 8. It was a short sale and we are putting a new roof, updated electric, and interior renovations in. My question is about property insurance. Can anyone recommend insurance companies that allow section 8 tenants. My agent has tried 3 different companies and all refuse to cover s8. 

@ I'm not sure I see $35k in NOI. Are you including property management, or do you intend to have the on-site caretaker do all of that for you - not sure what your plans or arrangements are for that. I plugged this into my spreadsheet and came up with ~ $27k NOI, PM difference making up most of that.

I'd also question the cash flow - based on current rent, if your NOI is somewhere around ~$30k, your debt payment is $1,375/month, right (80% of $255k, 5.25% over 20 years)? That is $16,500/year. If you add another 10% gross rent for Capex savings @ ~ $5,400, you're left with somewhere around $8k. I might have been a bit conservative with my NOI and capex savings, but still...

I still think this sounds pretty good, especially if you can get rents up to market. I see the purchase cap at more like 10.50% which isn't awful by any means. Just playing devil's advocate, sounds like it's a good opportunity - good luck!

@

I don't even see $200/month in cash flow. Quick math:

Income: ($600 + $575) * 12 = $14,100

Expenses: Taxes $2,500 (will they increase after new appraisal?), Insurance $600, Vacancies 1 month (might be conservative) $1,175, Property Management @ 13% (might be conservative) $1,833, Maintenance & Operations @ 10% $1,410, Utilities $2,600 = ~ $4,000 NOI

With a 20% down payment at $45k, on a 30 year mortgage your yearly debt payment is $2,316. Set aside another $1,410 for Capex (which is awful low), and your cash flow is around ~ $300/year. You would be getting some equity from the mortgage paydown but one big capital improvement could kill you. That is the danger of these cheaper properties, Capex takes such a big bite out of your income.

I would personally not be interested in this but if you still are, try talking to them and ask if they would be willing to do a package deal with the other properties you mentioned - maybe they could get the price down? Are rents below market?

I would say the seller/listing agent is greatly understating the expenses of operating this rental. $2k just doesn't make any sense. I don't know property tax rates in this area (aren't property taxes high in TN because there's no state income tax?), but on a $400k house I would except the taxes alone to be much more than $2k. You need to add insurance, maintenance and repairs, property management (even if you are managing the property yourself, you need to account for this cost because the next buyer likely will), and any utilities you will be on the hook for. A very simple, rough rule of thumb is to assume 50% of the gross rents will go towards expenses. Based on their $20,585 income figure, they are saying expenses are ~ 9.75% which is obviously a fantasy.

I'm not sure why income was so low, maybe it has something to do with deployments as a posted above stated. I would run away from this.

Quick analysis:

Income: ~ $109,060 ($740 x 12 x 12 + $2,500)

Expenses: ~ $65,000 (taxes ~ $17k (be sure to check millage rates to get a better number), insurance ~ $3,500, vacancies ~ $9,000, property management ~ $14,000 (using 13%, might be slightly conservative), maintenance/repairs $10,900 (10%)). This does not include Capex which will affect cash flow below

Income - expenses: $109,060 - $76,000 = ~ $44,000 NOI

$44,000 NOI / your area's cap rate = price. I'm from Michigan but not too familiar with GR area, from the little I have looked at in that area it seems like most are ~ 7-8 Cap rate or even less. I have been picky and shoot for higher, 9-10 cap. But at an 8% rate, the price would be around $44k / .08 = $550k.

Research the area, what the going cap rate seems to be, you said it was an A/B area which would suggest a lower cap rate and higher price. Also, while you mentioned that the outside looked good, there were some possible renovations. Would need to factor that in to your analysis as well. The possibility to increase rents could be factored in with this as well, although I don't like the idea of paying more for the potential rents. If it were simply a matter of increasing rent, why hasn't the previous owner done it? It takes work, time, and money to do that.

To calculate cash flow, take your $44k NOI and subtract dyearly ebt payments and capex savings.

Hope this helps!

I've really found that to be true - very tough to find anything with numbers that make sense. Case in point – last week got referred to an 8 unit that was about to be listed. Got info from the agent who told me it was 9.5% cap. Looking at their expense numbers, they failed to include anything for property management, maintenance, or vacancies. Even if the owner self managed and took care of ALL of the maintenance himself at little cost (yeah right), and the properties taxes remained the same even after a reappraisal, you wonder what buyer/lender would underwrite this. I tend to be more conservative with vacancies/maint/capex like you guys. As frustrating as it can be, I’m starting to realize that piling up cash is a valid strategy – don’t force it – when this junk sells in a few years you’ll be there. To answer your initial question, no I don’t see anything wrong with your analysis. I might even bump up PM a point or two more unless you know 10% is reasonable with lease renewal fees. I normally use 12-13% to be safe and if something looks decent, you can sharpen your pencil from there.

I think it looks pretty solid especially with possibility of increasing rent. I'll play devil's advocate though:

1. What initial repairs are needed? You mentioned it has been on the market a while - is the roof/furnace/appliances/water heater/etc etc nearing end of life? Not sure if you've been to the duplex yet but that might be one reason why it's been on the market a while with what at first glimpse appears to be good numbers.

2. Are any utilities paid by owner?

3. CAPEX and Maint at 8% seems fair but might be a little low. Kind of tied to first point.

4. Can you get PM for 8%? Does that include leasing fees? It might run you a little higher.

I'm just nitpicking because you asked for feedback, it seems like a pretty good investment (with the big question of eminent capital repairs being key). Nice job!

Here are some quotes for different coverage amounts I got from my insurance guy in December, as far as I know it's just simply based on coverage amount :

Coverage Amount $100,000

Premium Cost: $826/yr

Coverage Amount $150,000

Premium Cost: $1072/yr

Coverage Amount $175,000

Premium Cost: $1196/yr

Coverage Amount $200,000

Premium Cost: $1320/yr

Coverage Amount $315,000

Premium Cost: $1,897/yr

It gets cheaper the more you buy... from .00826 - .0060 cents for every dollar of coverage. Probably will need adjustment from region to region and different insurers but should give you a decent idea when running your numbers.

Here’s a couple things I found:

- looks like it is in development but this is specifically for our situation. The website says this one doesn’t even require cutting pipe to install.

- this is available although it looks to be more of a whole-building monitoring system rather than a way to measure individual apartments. But works via wi-fi, sends the data to a dashboard for you to view, and monitors leaks. Even if you don’t submeter, might be something to check out.

- seems like this might fit the bill although I had trouble getting a lot out of their website.

I didn’t read the fine print of any of these yet, but one thing to look out for would be subscription costs, which I think all of these would charge you to be able to access the data.

I seem to remember a thread where someone talked about a type of do-it-yourself meter, the idea was you (or a plumber) can install these things where the individual lines branch off from the main line and get a monthly reading yourself. I don’t know much about plumbing but I’m guessing your estimator saw that there were some lines that serviced multiple apartments, so it might be tough to pull that off without rerouting some plumbing and/or installing new. If it was a smart meter and you could get a wireless reading, you could theoretically just cut a small opening in a wall, install the meters at points downstream where only one apartment is getting the water, and then patch the wall and collect the monthly usage. Then you would bill back the tenants pro-rata. I guess that would also require a wi-fi connection for you to get the data so that would be something else to consider. Sorry, I kind of went off on a tangent there, but point is, there might be ways to do it without ripping down walls. But even if you double the estimate to $8k, it would probably still be worth it. I’ll look around for that thread or see if I can find something online, and post here if I find it. Let me know if you come up with anything!