All Forum Posts by: David Turner

Hey everyone. Sorry its been so long in updating. I have been real busy lately. Since I last posted I got my RE license and have been working on getting that business off the ground.

As for the apartment it is going pretty good. So far we have been putting all the income back into the building. We have had to replace a few AC's and a few hot water heaters. The previous owner had put down vinyl wood flooring in a lot of the apartments, but we are finding out that they didn't install them properly so they are pulling up from the subfloor. We have had to redo a number of the apartments. We have been replacing a lot of the exterior wood due to rot. We are getting ready to paint the exterior.

We also had a little bit of an issue with a fire. The apartments have fireplace's and I guess one of the tenants didn't open up the vent when they lit a fire. Ended up loosing the entire wall where the fireplace was. The fire department thinks they might have used lighter fluid or something to get it started. Gotta love tenants. It was about a $2,000 repair. Cost a bit extra because we had to do everything above board due to the fire department responding. We drywalled over the fireplace so that we won't have this problem again, at least in this apartment.

Overall the management company is doing a good job. The manager and maintenance guy are great. They are very pro active about taking care of the place. They have been raising the rents on the incoming tenants. I can be as little or as much involved as I want to be. I usually stop by about once per month. I get detailed reports every month. Once all the work is done I think we will be able to sell for a significant gain. Unless I decide to keep it.

@Stephen Masek That is always that risk. You can't make money in this game if you aren't willing to risk anything. While it could happen, I don't think it will. First off we bought it at such a low cost ($25k per unit) that values would have to go down quite a bit in order to not be able to sell to at least pay off the loan. And thats only if we aren't able to refinance.

As far as rents going down, thats not real likely. Texas has been pretty insulated from the recession. Prices here never rose like a lot of places, so they didn't drop like other places either. Not only that, but with the large influx of new people here, there is always demand. The location is in high demand due to being 5 minutes from downtown Dallas. Plus, the garages are a big selling point.

@Marshawn Moore Commercial agents are generally brokers. I don't know about California, but here in Texas you have to have 4 years working as a licensed agent along with having done a number of deals before you can get your brokers license.

@Ace A. Mortgage expense is not part of NOI and it is certainly not part of Cap rate. NOI and cap rate are a measure of the properties performance. That performance does not change if you have the building paid off, or a mortgage, or what your downpayment is. NOI is based off of operating expense. Mortgage expense is an ownership expense, but it is not an operating expense.

Cash on cash and ROI take into account downpayment and financing. Thats what they are for.

As I said before my projected NOI is $82k. At the acquisition cost of $800k that is a 10.25% cap rate. Really its better than this because the manager is not going to be living on site which will allow us to rent that apartment.

@Bruce L. There are two areas we hope to reduce expenses. One of our biggest expenses is water. As I mentioned earlier, we are getting new low-flow toilets for free from the City of Dallas. This should help reduce our water costs since the current toilets are 30 years old. I don't know how many gallons they use, but it could be anywhere from 3-7 gallons per flush. The new ones are 1.6. That is a significant difference. Also, who knows how many of those old toilets run and waste water. My property manager is also going to be spending the next few months going over all the buildings plumbing in order to repair any leaks. This should save us some.

The other big way we hope to bring down expenses is by bringing the property up to shape. As the deferred maintenance is completed this should reduce the cost of repairs.

@Michael J. These are all some things that have been discussed/considered. My property manager just did a market survey and it shows that we are in line with our market. However, we have one thing they don't: garages. Because of this we are planning on raising rent to account for this. We have also discussed renting the garages separately, but I think we are going to see how the rent increases go first.

Right now, I think the garages are pretty crucial for some of the tenants. During our walk through I saw a bunch of building supplies stored in the garages. For example, there are two garages that are jam packed with roofing supplies. Talking to the previous manager he stated that the two apartments were rented by brothers who are roofers. For them, the garages aren't just a place to store junk. They are their livelihood.

It's not really possible to rent the garages to non residents as their wouldn't be enough parking. The additional parking spaces are directly in front of the individual garages. There are only a few other spaces for visitors.

There are only two utilities, water and electric. Trash is a dumpster so we can't sub-meter that. Sub-metering the water isn't really feasible. It would be very costly and the tenant base (hispanic) prefers not to have additional costs, and the City of Dallas requries large deposits to set up service that isn't feasible for this type of tenant.

I think your going to have a hard time convincing a seller to pay for it in hopes that you will buy their property. Why would someone spend $300-400 without even having a purchase contract in place? Why don't you give him a purchase contract with an appraisal contingency that lists him paying for it? That way he has some assurances that you will be buying the property.

@Ace A. Thats not exactly right. First off is the management fee isn't 10%. I just stated it was because it ends up pretty close to 10%. I based that off of the management fee and the managers salary ($11,400+$9,000=$20,400 which is approx. 10% of the effective rent of $204k). The employee unit is not a cost, but a loss of income. Hence why it is included in the effective gross rent. The application and late fees are an additional income.

The admin fees are a number of fees including phone, licensing, office supplies, bank fees and credit/background checks.

Maintenance salary is a repair expense, not a management expense.

Service contracts do not include capital repairs. Capex are not part of NOI. Service contracts security patrol and landscaping. I don't know the exact break down.

Mortgage is not included in NOI so I didn't include it. It is around $3,500 a month.

Hopefully we will be able to bring a lot of these expenses down over the next few years.

Somehow I messed up my NOI in my previous post. It is $82,128. After the mortgage payment it is about $40k left over.

@Ace A. My budget is as follows:

$224,400 Scheduled Gross Rent

-$17,400 Vacancy/Write offs/Loss to Lease

-$6,900 Employee unit (looks like the employee will not be using this so we should save this.

$4,140 Late fees/Application fees

$204,240 Effective Gross Rent

-$2,424 Administrative

-$1,850 Marketing

-$9,000 Manager Salary

-$16,900 Maintenance Salary

-$1,166 Workman's Comp

-$2,331 Payroll taxes

-$18,914 Repair and Make ready

-$1,200 Service contracts

-$11,400 Management Fee

-$540 Pest control

-$780 Electric (common areas and office)

-$3,060 Trash

-$19,020 Water and sewer

-$10,316 Insurance

-$23,211 Property Taxes

-$122,112 Total operating expenses

$75,803 NOI

I do not have a 9-5 job. I left the corporate world a few months ago. I do not feel it would have hampered me though. Most of my involvement is through email with the occasional phone call. I visited the property maybe 5x before closing. I think that my involvement from here on out is totally up to me. The manager will provide me with monthly reports by email and that is all I have to do. They are taking care of everything else including paying bills, setting up utilities, they even fired the sellers manager. I plan to be more involved though. I will be visiting at least once a month just to keep them on their toes. I'm also making sure I am kept abreast of all goings on.

@Russell Ponce I read a bunch of books. The best ones I read were Steve Berges's "The Complete Guide to Buying and Selling Apartments" and David Lindahl's "Multifamily Millions".