All Forum Posts by: Ed Matson

@Dakota Hicks - A couple of comments on your expenses: 1. Repairs at 6% looks too low. I use 10% of gross rental income. Also your utilities at $880/month looks more like an annual expense for two units' sewer and water? I use Cap Rate and ConC return numbers to determine max purchase price. In my CT market, if I can get a true 9 CAP (w/out PM) for B- properties I am happy. I wish I could get a 12 CAP that wasn't in a war zone

It will be easier to get a loan as individuals from a bank in 3 years than as an LLC for this size property. Something to consider.

Muchof the answer depends on two factors: 1. Is she an accredited investor?and 2. How passive does she want to be?  If she is an accredited investor and really desires her RE investment to be truly passive there are several good funds she can consider ranging from lending to longer term investments. 

Also, property management is 2.5% of rental income.  Since the property is 4 hours away, I assume you will need full property management which should be in the neighborhood of 9-10% of rental income for a property of this size. 

Hello @Bhanik Shah, With the small amount of information you are providing it is difficult to comment in any meaningful detail. However, the 8% cash payment and the 20-25% IRR are not very different than many deals I have seen. I am bothered by the words "at least" 20-25% IRR. Although this type of IRR is quite possible on new construction, most reputable promoters are more careful with there wording so as not to promise a minimum IRR of 20%. New construction is the most risky of all RE investments and a lot could go wrong to affect returns. The lease back to the university sounds very interesting. You should get those terms to understand the income stream. Also, if it is a 3-5 year deal, what is/are the exit strategy(s). A $100K is a pretty big investment for a first deal. How well do you know the promoter? The sponsor's reputation and track record are of utmost importance.

Newburgh NY has relatively high crime and high unemployment.  There are some quite bad neighborhoods.  I would not invest there without a very strong local knowledge.  I live in CT about 1.5 hours away and we have friends who live there.

100 year old 3 families in the Northeast is not exactly passive investing.  

@Phil Morgan is correct. The current value of the property should be based on the current and not future NOI. The property is not selling because the property's asking price is based on its future and not current value. 75% of the tenants are not paying on time. How can the NOI be positive? This is a substantial project to turn around this "train wreck". Do you have the required time, experience, and knowledge to do so? If so, this may be a good opportunity if it is in a good area and can eventually be a good investment.

@Don Nelson, For rental properties, I always use the actual, not future, CAP rate to value the property. I think of rental properties as assets whose purpose it is to generate income. Without this, they have no value in my book. I also look at the value of the stream of cash flow. These are all standard measures. If you are considering a purchase of 79 units, you would be wise to read up indeed.

@Don Nelson, We have a 46 unit MF. Our total Op Ex is about 40%, so I agree 30% is low. 40% seems about right for our size and age (17 years) property. We pay in the range of 8-9% for property management. Of this about 60% is for the resident managers and their payroll taxes. The on site manager and asset manager are two different components of property management. For 79 units you would be wise to hire a PM company that will provide on site managers. By discrete line item, I mean I normally add my estimated rehab costs to the purchase price to determine my total capital cost. If you plan on funding the interior rehab from operating $, that's fine, but you will need to increase your R&M costs accordingly. If you start the exterior work immediately, where does this cash come from? You've got about 30 units needing roofs and exterior work. I would at a minimum make this a separate line item to be added to the purchase price to determine your total acquisition cost. As a very simple example, last year I bought the "cat piss condo" for 43K. Rehab estimate was 31K. So, I needed 74K to purchase the unit, not 43K. So, all my numbers were based on a total cost of 74K. Your situation is similar, except your exterior rehab costs are probably proportionately less and you have 30 units to do. You can see this allowance on the BP rental property calculator. These costs should be discrete in my mind because they are CapEx, and not OpEx and will be incurred in a relatively short period of time after purchase, and are non recurring (over the short and mid terms). I hope I answered your question.