All Forum Posts by: Ken P.

Christina,

A few more bits of information are needed to assess this deal. What are the annual property taxes, who pays the utilities (water is usually handled by the HOA, but not always), and does the HOA have adequate reserves to cover major repairs like roof replacements and street resurfacing?

If the taxes aren't too high, the deal looks promising. We bought a short sale condo last year for $75k with $250/mo HOA and $200/mo taxes that has a retail value of ~$110k that rents for $1250. After those expenses and financing costs it's giving us about $250-$300/mo cash flow after setting $$ aside for maintenance. Your numbers should be higher.

One challenge with condos now is non-owner-occupied financing. Depending on the state, some banks/mortgage companies won't finance rental condos, so you may have to check around.

Update:
We have an agreement in place at $23,000/door with 35% down, 5/20 financing @ 5%, and are now discussing EMD, and a few other points. One stipulation I want is release of title of a certain number of units at milestones, so I don't always have all of my money at risk. For example, at 40% down, receive title to 30% of the units (leaving 10% skin in the game), etc. That would also allow me to test the market by rehabbing a condo and seeing what it would bring.

Legal rates?
With the outlines of an agreement, I've started talking with real estate lawyers experienced in multi-family property and land contract financing. A friend with many properties said his real estate lawyer's rate is $300/hr. An experienced lawyer I contacted via my real estate agent has a rate of $280/hr. Is this typical?

I wanted to send a brief note to update BPers on the status of this thread. After researching the rental history for the complex, and sales history, I submitted an informal offer at the end of last week, and am waiting for a reply. If we can agree on general terms then we'll solidify the terms and move forward.

I approached the deal as if buying condos individually which would be resold individually down the road, as indeed might be the case. While the documentation I've seen so far shows a 10% cap rate at the asking price, I knocked it down to account for the deferred maintenance and updates (windows/kitchen/bath) that would be needed to get a good sales price as condos.

For terms, I've offered 35% down and a 5/20 renewable land contract @ 5%, as the owner seems more interested in cashing out than maximizing sales price or monthly cash flow. We'll see from his response whether that's actually the case.

I've learned that the property management company that handles common areas is the same as on another rental condo I have in an upscale development in a different city. While not the quickest to respond to work orders, they are at least competent and professional. An examination of HOA bylaws and account statements will be part of due diligence if this moves forward.

Craigslist, Hotpads, and other rental sites are going to be much better places to get honest info on rental rates than a property management company, IMHO. Spend a few weeks getting to know your target rental market by following listings, seeing how long it takes for them to drop off as they're rented. Particularly with Craistlist listings, which don't charge the owner every time an inquiry is made, you may be surprised how much you can learn about a rental market you're interested in just by calling up the numbers in ads and talking with the investor/owners about their experiences.

Property management companies are businesses and ultimately have their own bottom line as their number one concern. That should come from maximizing your bottom line, but that isn't always the case. While living overseas where managing my US property wasn't practical, I've dealt with several different property management companies. The quality of customer service differed widely, but even in the best cases I never thought that the standard 1st month's rent + ongoing 10% cut fee was worth the service received. Since returning I've managed my own properties, and don't plan to ever use a property management service unless and until I get into large apartment buildings down the road.

The BP community needs some more information before being able to comment on this potential deal. What are the property taxes? Insurance? What would you budget for repairs after purchase, if any? I don't know why you'd assume a 7% loan when 3.5% 30 year loans are available, or <4.5% for investor loans. What financing can you get?

Thanks to all for the input. You've given me plenty to think about and investigate. A possible HOA ban on renting certainly wasn't on my list of HOA-related concerns, so my eyes have definitely been opened more than they were.

Wow! I just looked at the photos; quite a wreck. My brother bought a triplex in similar shape a few years ago, and it literally had to be gutted to the studs and completely rebuilt, with new *everything*. You may find that $80k is on the low side. You really need a rehab contractor at your side to get a solid plan.

If you're looking for your first deal, I'd encourage you to keep looking for something with a few less unknowns, where the chances of a successful outcome are higher. If you find this is a money pit and end up eating a big loss, it could turn you off from what would otherwise be a profitable investment path.

Hi Bill,
Thanks for the quick reply. The complex has several hundred units all together, a mix of owner-occupied condos and rentals, so the seller is just one among many owners. The HOA IS my biggest concern about the property; I have one rental condo now where the HOA fees have gone from $100/mo when new in 2004 to $275/mo now! A big increase in dues would wipe out any profit on these 18 units unless I pass it through as a rent increase. I've requested a copy of the bylaws and the HOA budget documents for this proposed property, and plan to attend the next HOA board meeting.

I am a SF investor looking for the first time at multi-family. The property in question is a block of 18 1BR condominiums currently being operated as apartments. They are part of a tranche of ~40 condominiums that the current owner once held in a development from the 1970s, spread out among several 12-unit buildings. He sold a number of the units individually when the market peaked in the early 2000s, and now wants to get out of active management of the remaining 18 units.

Now for the numbers:
Asking price $450k ($25k/door)
Gross rent - $112k
NOI - $48k. I would probably drop this about $3k-$4k to increase furnace/AC replacement provision

Expenses included are property tax, interior repair and maintenance, vacancy & lost rent, and the biggest, hefty association dues of $120/unit/mo which take care of the exterior and commons. The buildings are in good shape, and the HOA dues are covering roof replacements, paving, and other major expenses without special assessments. Tenants pay all utilities.

100% occupied, largely with long term tenants. He has rent history to show that he hasn’t stacked the units with tenants to make cash flow or occupancy look better. The downside is rent is at market rate for most of the units, and obviously occupancy has no room for improvement, so there isn’t much income upside potential.

Terms offered are 25% down, with land contract on the balance, 5/20 year @ 6%, extendable.
Cash flow with these terms is only $90/unit/mo, but over the 18 units yields enough that it’s 16-17% cash-on-cash, which is a number that I’ve jumped on when buying SF.

I’m looking for some feedback/additional questions to ask, as multi is whole new ball of wax from SF.

Matt Sheridan, a very entertaining read, full of good lessons. We're also finishing up our first year as returning landlords (we'd landlorded years ago and had to give it up due to job transfers), and are glad we made the leap. After frustration as many offers went nowhere or blew up for various reasons, we picked up a like-new condo in a short sale, and then closed on and rented a foreclosure single family house. In both cases we offered "best product, best price" and were spoiled for choice by by the good quality tenants looking for good housing.

A "lesson" from being a new landlord has been the lessons we're able to pass on to our teen and tween daughters about diligence, hard work, saving, and investing. As we look for properties they've watched us search for and then evaluate many different houses, have learned about the importance of saving money for down payments, we've had them calculate NOI, cash-on-cash, and total ROI, and had them join in some of the work as we prepped the houses for rent. Oh, and we showed them our bank interest statements for comparison so they know why 25% ROI is good! While we hope they go to college, do well, and find a rewarding career field, we want to open their eyes to ways they can later make their earnings work for them.