All Forum Posts by: Garett Scott

I had posted this deal a couple of months ago.  The property is still listed (red flag) and I am revisiting this opportunity.

Asking Price: $260,000

Apartments: 9 Units (Fully rented, average rent is approximately $370/mo per unit ... total $3330)

Restaurant Space: 1566 Sq Ft (Currently rented for $1000/mo)

Retail Space: 756 Sq Ft (Currently rented for $500/mo)

Total Gross Revenue: $4830/mo ... annual $57,960

Expenses:

Taxes - $6098 (2.345% of Purchase Price)

Insurance - $1800 (Estimation)

Maintenance/Repairs (5% of PP) - $13000

Property Management (10%) - $5796

Vacancy (10%) - $6166 (10% + 1st month rent for vacancy)

Miscellaneous (Garbage, Pest, Snow Removal) - $1200

Water - $1500

Mortgage (4.00%, 20-Yr Am, 20% DP) - $15120

Total Expense - $50,680

Free Cash Flow/Mo - $606 ($7274 annual) ...$67 per door.

Debt Coverage - 1.48

1 or 2% Rule - 1.86%

50% Rule - 61.35% (Allocation to repairs is heavily conservative.)

ROI - 8.62%

CAC - 13.99%

Vacancy for the apartments are near 0%.  They have been practically 100% occupied for the last couple of years.  The property is low income, attracts Section 8 Tenants. (I have requested how many are in-fact section 8.)  I will be completely an absentee owner, property manager will handle everything. There are two apartments that need renovation that are currently not being used, this would make it a total of 11 apartments. (I do not know the extent of the renovations.)

The commercial space is rocky at best.  I would not rely on that income whatsoever.  The apartments rent above the commercial space.  Low income above a commercial property is not indicative of success.  My goal is to purchase the property at a price which the apartments will service the debt service at a 1:1; the commercial space leased would be gravy. (Taking into account adequate vacancy.  I feel 10% is a conservative estimate considering the property manager is paid to keep vacancy low.  Not to mention she manages multiple section 8 properties and has experience in this niche. In addition the property manager does not collect 10% from the Section 8 subsidized income portion of the rent as "she does not do work associated with collecting the Section 8 portion of the rent."  Therefore, management fee of 10% is conservative.)

I have even considered renovating the commercial space into additional apartments in order to keep a more consistent stream of income.  To reiterate, the commercial space is not reliable and has proven to have quite a bit of turnover in the last couple of years.

The bank terms are exact.  I am currently a commercial lender with the Bank that would offer said terms. (I prefer the longer amortization in order to give flexibility in payment if vacancy/repair cost does in-fact become an issue.  I will prepay the note during good years to reduce principal drastically.)

How do you guys feel about the deal in general? It is located in a decent area surrounded by commercial business.  The town's commercial sector is not the best, quite a few business are leaving, growth is stagnant.  There was a Bank of America directly adjacent to the property which would attract business to the commercial space.  This has since closed.  There are small mom and pop shops all around this area.  Rather busy during the day and evening.  

In addition, I am exceedingly nervous in terms of the repairs/maintenance associated with a Section 8 rental.  I do realize this will come down to tenant quality which will be the managers responsibility.  I have heard horror stories of massive repair bills from low income tenants.  What are your guys' experience? (In my mind approximately $100 in repair/maintenance per door or 5% of purchase price is exceedingly conservative.)

Over the last two weeks I have been fortunate to analyze a few deals.

This particular deal is a 9-unit apartment building with store frontage and a restaurant. (Most of the apartments are Section 8, located above the store/restaurant. Restaurant is changing owners ... to my understanding, all of the restaurant equipment is included. Seller of the property has gotten into personal legal trouble and is leaving the state.)

Purchase Price: $260,000

Down Payment: 20% ($52,000)

Loan Amount: $208,000 (Interest rate of 4.00%, 20-year amortization)

Monthly Debt Service: $1,261 ... $15,132 annual.

(I work at a bank in the commercial lending department ... getting a loan is a non-issue ... I have little to no debt, equity, etc.)

Revenues:

Rents: Est @ $4750 per month, $57000 annual.

(Listing states just shy of $5000/mo .. no breakdown given between units/commercial space ... The property is located near semi-popular restaurants/stores ... however, I am skeptical as to the strength of the commercial space ... current commercial tenants are Mom/Pop ... I feel commercial vacancy may be an issue, especially with low income renters living directly above their store(s).)

Gross Revenue: $57000/annual

Expenses: (Estimations)

Tax: $6110

(Local tax rate - 2.35% of purchase.)

Insurance: $1500

Property Management: $5700

(10%, Referred from co-worker who has Section 8 building. Management does not collect on Section 8 portion of rent ... claims she did not work to earn that portion. Therefore, 10% is conservative. I wish to stay anonymous, LLC will be established with an attorney listed on documentation in-case of property search.)

Repairs/Maintenance: $12,000

(5% of value ... this category worries me the most ... I have no historical data, etc ... however, it is Section 8 and they tear your apartments up ... wanted to budget sufficiently. Am I too conservative? I have never owned a rental property in the past, let alone Section 8.)

Vacancy: $5700

(10% ... mostly the commercial space I am worried, Section 8 will be lower vacancy .. typically)

Water: $2000

Miscellaneous: (Snow Removal, Garbage, Pest, etc.) - $3000

Total Estimated Expense: $36,010 (63% of Rev)

Net Income: $20,990

Return-On-Investment: 8.07%

Debt Coverage Ratio: 1.39

Rule: 1.82 (I would look to get it bought for $235,000 ... to meet 2% rule.)

Cash-On-Cash: 11%

I realize will have closing costs, etc. that I have to factor into purchase price, not to mention, I would assume there will be repairs that will be needed.

What I am most afraid is the repair cost associated with Section 8 Tenants and the vacancy rate of the commercial space below Section 8 ... currently the one business is leaving/being sold as the Seller operated that business and the other is a dog grooming place. Not to mention, I am not sure how the utilities are paid, I am assuming the tenants pay their own utilities ... however, if I am liable for utilities and Local Housing reimburses me for the utilities ... I am assuming the utility cost is already factored into the rent received ... thus I would have to add another expense line for utilities, could be astronomical.

What are your guys thoughts? Am I too conservative on the expenses? (Building is older, 7500 square feet ... Section 8 Tenants ... poor demographic.)

Appreciate the feedback, I have sufficient cash on-hand to invest, I just want to find the perfect first property.