All Forum Posts by: Dustin Espinoza

@Dustin Espinoza, hi and welcome to BP!

Yes, you have gotten a good start by asking to find out what you don't know.  There are a lot of things you need to know to analyze a property.  I'll try to cover some basics, but there is much more to be said:

1) Expenses (taxes, insurance, maintenance, property management, utilities, lawn care, snow removal, legal fees).

2) Vacancy rate.

3) Capital Expense reserves.  How much you will set aside each month to cover big ticket items like HVAC systems, roofs, and kitchen / bath upgrades.

4) Profit expectation.

5) Debt service, if you plan to borrow some or all of the purchase and fix up costs.

A few rules of thumb:

1) A smaller property (under 50 units) that doesn't meet the 1% rarely cash flows positively.  To calculate the rule, take the MONTHLY gross potential rent (market rent for all units at 100% rented) and divide by the total "all in" costs to bring the units online: purchase price, rehab, closing costs, holding costs.  For example, let's say your property costs $75,000 per unit and you will spend $5,000 on average per unit in fix up costs.  Closing costs for the property are $5,000 and you have to hold it vacant for 2 months, during which time you spend $800 on lawn care and utilities.  Add up all your costs ($75,000 x 10 units + $5,000 X 10 units + $5,000 + $800) gives you an "all in" cost of $805,800.  The combined monthly rents must be AT LEAST $8,085 or about $800 per unit per month.  $8,085 / $805,800 = 1%.  

2) Always include all expenses, even if you plan to DIY.  For example, property management and maintenance are two areas many "investors" buy themselves a volunteer job: they do they work to "save" money, but they work for free.  Pay yourself, even if that means simply take that amount of money and put it into a savings account or use it to pay down extra debt.  Any other investor will value the deal assuming there is hired out maintenance and property management, so you should include those costs too to get a true Return on Investment.

3) Smaller properties (<50 units) are usually not self-sustaining enough to hire a full time PM and maintenance man, so they will not be attractive to larger investors. This is important to consider for your exit strategy.  Whom are you selling to, assuming you plan on selling?  

4) What are your goal(s)?  Monthly cash flow, appreciation, both?

That's a lot to think about for now. You can probably get most of the info on expenses from the Seller's Schedule E income tax filing, assuming the property is owned by an individual.  I would make that a condition of any offer.  Ask for their expenses up front, but then make the offer contingent on verifying expenses on official tax records.  Sellers tend to "forget" (lie) about expenses except when it comes to tax time, because that's when reporting all of your expenses saves on taxes.

I hope this is helpful.

ask for a breakdown of all expenses. Those that are paid by tenants, and those that are paid by the landlord. Your concern are those paid by landlord, but it's also important to know what tenants are expected to pay as this affects their total monthly costs. 

with the limited information you listed, it seems like a good deal so far. a little over 9 times rentroll, $62,500 per unit. I'd say you're probably at about 7% cap rate. 

good luck, let me know if you have any questions. 

Thank you for your response Peter. On regards to expenses, I know the tenants are in charge of utilities, which is a plus for sure, but I don’t know the figures so I will requesting that along with the landlord expenses. 

Also, what “rule of thump” are you using to determine the $62,500/unit price and how did you come up with the 7% cap rate? I’m just wondering because I have been attempting to determine the cap rate and wasn’t successful because I thought I didn’t have enough information. 

@Dustin Espinoza I'm glad to see you are thinking about the area and your tenant.  What are your direct competitors doing in that area?  If they all have central AC, I think that is your answer.  If they aren't, then you have to balance out if putting central AC in really makes you that more competitive.  Essentially, I'm saying don't over rehab if the market won't support it.

@Dustin Espinoza ive no issue renting out units without central air. The $400 AC units that vent out the window are actually supposed to be really good

it will certainly effect the rent you can get, having central air is a must to get top dollar for rents and in my opinion the right type of tenant. I own a HVAC company and site unseen we can do a system for about $5k and doing all 3 at once can save a few more dollars. I have done very well in the Charlotte area with buying duplexes that are a little run down and no AC.

If the price for the triplex is GOOD then  thats the most important thing.  Yes, you can still rent the unit with window units. you might not get as much as a unit with HVAC but if you charge 50-100 cheaper then you will not have any issue with renting it. So most important thing is to BUY IT RIGHT. if you are adamant about putting a HVAC unit expect to pay between 4500-5500 to have it done RIGHT. I did one on my triplex about 2 years ago. Of course if you get closer to 4500 thats a GOOD price so hop on it. I am also in the same area as you if you need a licensed HVAC guy. S/N if your open to wholesaling the triplex I'm still buying for the right price. 

@Dustin Espinoza What kind of heating system does it have?  If it has forced air adding central air is not that big of a deal.  You can get a quote on that very easily.  If they are currently occupied units and renters are happy with the window units it also may be a non issue.

I used to rent may years ago the 4th floor of an apartment building . We had a window unit in every room.  IT was a pain but, it didn't keep us from renting the place.