All Forum Posts by: Richard Lindman

@Brandon Vannier

I don't know of any hard and fast rules for this.  It is fluid depending on the situation.  I will discuss the situation with my PM and work out a plan based on his knowledge of the area.  

@Brandon Vannier

Thank you.  For your deal, It might be possible to negotiate a lower price or maybe find some hidden value such as the units are under priced for the area that would up your returns. Or maybe the city has earmarked the area for renovation?  There are other variables that might turn a so-so deal to a great one.

@Kevin Douglas

It might still be a good deal.  The repairs can be used to negotiate the price lower.  I have normally purchased MFU s that are not section 8 and bring them up to standards.  Costs me some more upfront, but it is a long term strategy.

Is the foundation work cosmetic or structural?

@Ian Skelton

@Cody L.

Ok, I will add yet another closing thought on analysis.

I use a multi step process to analysis properties. It is my belief you cannot have enough information, but you must set boundaries to the data to avoid analysis paralysis. 

1.  The first is the "back of the envelope" calculation similar to what Cody was suggesting.  One month gross rent / asking price.  This number varies based on the area, ranging from 1.2 to 1.7 percent minimum.

2. If it makes my preliminary number, I then will perform a detailed analysis as I did for Ian's potential deal.  The analysis is not difficult as I have built a spreadsheet specific to my needs that will calculate everything that I consider. All that is necessary is to enter the numbers.

3. If the detailed analysis meets my criteria, I will have my realtor inspect the property. He also is a REI, so his report on the property is very detailed and from an investor's point of view. If I like what I hear, I get the property under contract asap.

4. Perform due diligence. At this point I will have access to the actual financials and can see how honest the pro forma was.

5. Have my property manager (also a REI) and inspector review the property. If there are any issues, I will rerun the numbers accounting for the additional costs and adjust my offer accordingly.

Again, this is just a high level and not carved in stone.  Hope this is of help to you all.

@Ian Skelton

You are welcome.  

Closing thought.  When investing in Class C properties, I am only considering cash flow and not appreciation.  So appreciation (if applicable) may be another component to consider in the equation.

@Ian Skelton - Aloha Ian,

I am still leary of the vacancy assumption and the true cost of vacancy (the landlords greatest expense).

Here is what I have calculated for the property based on 600 dollars per unit:

1. Vacancy rate of 8.3 %  - Based on the assumption of turning over two units each year requiring 60 days to fill the vacancy. With 4 units and twelve months, there is a total of 48 rent months in the year that you could collect rent.  Divide the empty months by the total rent months ( 4 / 48 ), and we will have the vacancy rate.  This will result in an adjusted gross income of 28,800 x -8.3% = -2390.00

2. Make ready / repair cost per unit: 600.00 (This is an estimate and assumes that the unit is currently up to Section 8 standards).

3. Other expenses per unit:

a. Rekeying locks: -150.00

b. Utilities (they will be in your name now) per unit: -120.00

c. Site trips by your PM for section 8 inspections per unit: -100.00

4. Tenant placement fee charged by the PM is normally one month rent per unit: -600

5. Reduced management fees while the units are empty: 240.00

This leaves us with a total cost of vacancy of 4,330.00 which in turn leaves us with an effective vacancy cost rate of 15 %. This is 3x what you were anticipating using a straight vacancy rate. The straight rate of 5% is what I believe to be normally associated with SFH. When dealing with MFH the vacancy rate is normally higher, particularly when dealing with low income housing.

So, my calculations (with your supplied numbers and my vacancy adjustment) are coming up with a NOI of 1,572.00 and COC return of 2.87% after mortgage or 32.75 per unit.

This is just an example of other numbers I would include when I am evaluating a property. This does not mean my assumptions are correct for your market.

There is wiggle room in the cap exp and repair fund. Once you have the actual detailed income statements for the last three years, you can get a feel for the true costs involved.  You will also be able to see if the owner has been deferring maintenance after your inspector has completed an inspection of the property.

On that note, before you have the property inspected, be sure that you already have your property manager in place.  He should be willing to go out with the inspector to review the property and tell you any issues he sees and provide an estimate of costs.

Be sure your property manager is experienced in Section 8 housing.  You want someone who understands how the system works and what the expectations are of the section 8 inspectors. This was a lesson I had learned the hard way in San Antonio.  

Keep me posted on your progress.

Good luck,

Richard

@Kevin Douglas - Any time the contract is renewed, there will be a recertification of the unit required (at least in NY). HUD rules do vary a bit by state. There is no commitment to continue section 8 housing. If you do not wish to continue with section 8, you are free to do so. Considering the area, I would then include "no section 8" in my ad if I was no longer wishing to rent to section 8.

Have you reviewed the crime reports for the neighborhood?  Trulia has a down and dirty crime map that you can reference.

@Kevin Douglas - I have been following the section 8 path for a couple of years now.  A few things to be you should know:

1. The property will require an inspection by HUD/Sec 8 before tenant can take possession.

2. The voucher system allows for the potential tenant to have a real choice in where they live. If your property is in a very, very bad area, or is not above average (based on your market) you may have issues getting applicants.  

3. There will be more "service calls" from class c property tenants. 

The pros:

1. Tenants are held to higher standards by HUD / Sec 8. I had one tenant that had damaged the unit half way through the lease. He was required to make the repairs or lose his voucher. He paid for the repairs.

2. You are guaranteed a good portion of the monthly rent. HUD does not pay all, but a large enough % of the total. If the tenant fails to come up with their portion, you will have time to decide what steps to take while still getting that portion of the rent.

Let me know if you would like to discuss in further detail.

Aloha @Evelyn Kop

That book got me started on this interesting path.  After researching options on the islands (and a few conversations with some realtors on the Big Island), I have ended up going the out of state route, built the virtual team and started purchasing.  Let us know how the turn key works out.

Hi @Mary White,

I notice that you have not included any form of insurance or common utilities (electric for the common hallway for example) in your expenses.  

The cap expenses are meant to be a reserve fund for future capital expenses.  A single water heater can cost you 800.  So I agree with Travis that you are too low in this  estimate.  

What was seen the the income statement in terms of repairs and expenses?  That should be a starting point.  What did the inspection report indicate? How old is the building? This will have huge influence on your cap ex "prediction".

Predictions are just that, a prediction, and can be in error. It is better to err on the side of caution.  Particularly if this is meant to be a cash flow property and not appreciation.