All Forum Posts by: Spencer R.

Hi everyone, I thought that it would be instructive to resurrect this thread and give a followup of this investment that I made 5 years ago! After getting advice from this board and elsewhere, I decided to walk away from the purchase. The seller contacted me again and sucked me back in, offering to lower the price further, and I ended up settling on a purchase price of 505K.

A few key followup points for those considering similar purchases:

1. The expense ratio given by the seller was grossly underestimated as some of the above posters suspected...the expense ratio for the 5 years hovered around 60% including the large ticket items below...good prediction Joel and Jeff!

2. Consider painful big ticket items. I had to buy a new boiler 4 years in at 15K--ouch. And new pavement on the parking lot was required to the tune of 19K. Interestingly, the property management company that I was using at the time did not ask for up front payment for the boiler--they paid for it out of the cash flow over a number of months.

3. I was lucky due to appreciation! I sold the 12 plex last summer for 1.05M. Really this would have been a mediocre investment at best had the market not risen so much in the 5 year holding period. There were no major improvements with exception of the new boiler and new pavement on the parking lot. Although I did implement submetering on the gas system and raised the rents a bit which improved the NOI. I would have been better off "leveraging up" as Joel suggested and buying a 1.6M property which may not have doubled in value but probably would have given me an even better profit than 500k upon selling.

4. It is difficult to substantially improve a building with such old infrastructure. Even though we were able to raise the rents from 525-550 to 650 per apartment, a more substantial rent raise would have required a cost prohibitive complete gut and remodel (estimated cost 400-500K?) given the limited electrical capacity, lack of insulation, steam boiler and ancient plumbing, etc. For smallish 1 bdrm apartments I could not get more than 800-850/mo today in this location even with extensive remodeling and nice finishes.

5. Many folks on the forums know their stuff!

Thoughts?

Hi Eric the company is called RELMS out of Utah.

Hi everyone! 

I am looking to transition from multiunit residential to commercial and have been looking around for a quite a while. I would like to sell a paid off property and 1031 into a leveraged high quality tenant retail NNN property. It is hard to find one that has a suitable cap rate and length of primary lease remaining. I found one that is within my price range from with a national corporate backed tenant and a cap rate near 8%. The location is great on a main thoroughfare next to big box stores and other high quality retail. Initial cashflow looks great assuming I can get 70% financed at a rate of 4.5%, amortized over 25 yrs. What gives me pause is the length of the lease and escalations. Almost 20 years remain on the primary lease and they have four 5 year options after that, with 1% escalations each year. If total annual rents start out at 200k/yr, does that only give me 300k/yr 40 years down the line? Surely inflation would be more than that. Is that why the cap rate is more favorable than other properties I've seen? Again I am still in the exploration phase and am just looking around, I am not in any rush to make the switch.

I'm not sure if the OP is talking just about water, heat, electric etc. Just last year I had a company from Salt Lake City install a metering system for heat on my 12 plex. I thought about RUBS but decided on submetering for reasons stated above. It has been great. There was a small installation charge of $100/unit. They now monitor the heat usage each month and send a bill to the tenants calculated from their usage and corresponding share of the gas bill. They charge a $5/mo fee to each tenant included in the bill. The submetering company does not collect the payments though. They get sent in to my manager with the rent.

 There is one central steam boiler for the whole building, and I was on the hook for the whole gas bill in the past. I started with the tenants paying half of their heat usage. Each apt has its own steam loop and thermostat, so they just installed run time meters on each apartment's steam valve and calculate the gas usage from that. I got the tenants on board by promising not to raise the rent that year. We had to include language in their contracts when they renewed last summer detailing the terms of the deal. They have been paying reliably. As with all things, they could bail if they had better options, but my rents are on the low side so overall they still have a good deal. 

One of the side benefits is that the tenants now have skin in the game so to speak, and my gas bills have gone down a bit.

What kind of heating system do you have in your property?

Hey Joel, Seth and Lonie thanks for the replies. I am definitely getting the vibe from you guys to proceed with caution (or in Joel's case don't proceed at all!) so point taken.

I will get the financials for years past and try to let you know what I find.

The owner would finance the balance at 5% and did come down in price from 580, but I need more info...

I just got a little excited bc the deals have dried up in my preferred area and this seemed more in line with my previously purchased properties which have worked out very well for me.

Thanks again!

points taken Seth thanks for the advice. He wants to move quickly but I agree it is hard not to get excited and overlook things. It is sometimes hard to strike a balance between being interested enough to hold onto a potential property yet aloof enough to get the proper deal. The deal is only verbal at this point and I am still getting information. Will have my trusted inspector thoroughly look it over too.

Thanks Lonie I will check into those things. He did agree to guarantee the boiler for 2 years bc other people have also expressed concern about it. Also just informed of verbally accepted offer price of 545k.

Dennis - I looked up RUBS and it looks like an intriguing option, however I don't know how much the tenants would be willing to absorb, given the gas and water/sewer cost alone adds up to about 1k/yr/apt. And they already pay electric. But I maybe I could just set up the gas bill this way and pay the water myself...and figure out why it is so high. Thanks!

Anyone have an idea how much a new high efficiency gas boiler for a 12 unit building might cost?

Keep the ideas coming!

Thanks for the reply Dennis. I have a P&L from 2013 only, so that is a good idea to get more history and some tax statements to confirm the info.

Also, those expenses do not include management fees, which would be 8% of gross rents, knocking the 51k after expenses to 45k. Looking at the P&L, maintenance/repair costs were quite low, so I would expect that to be higher most years for an older place like this.

What is RUBS?

Thanks.

Hey everyone,

I have a potential deal I need some help with. I can buy an older 12 plex in a nice residential area (mostly sfh's on the street) for 560k. Gross rents are 75K/yr for 2013, with net after expenses (not including financing) of 51K. All units are 1 bdrm/1 bath.

The good:

-I have a couple of other rentals in the area and know the market...no problem filling with good quality renters here. college area. low vacancy.

-It is a solidly constructed building that has been kept up well in and out.

-Newer replacement windows, high ceilings, charming apartments/exterior, good parking.

-Separate electric meters.

-rents are on the low side, especially since heat is included (see below)

-have not seen a deal like this in the area lately

The not so good:

-Building was built in the 20's.

-Older wiring but newer breakers. limited to 2 circuits per apt. ranges are all gas.

-landlord pays for all heat with a gas hot water bolier/baseboard system. There is one large central (~25 yo) boiler, tenants do have individual thermostats however.

-gas bill for heat/hot water is 6.5k/yr

-water/sewer is 7.5k/yr!, 6x what I would expect for the area

-owner wants to close quickly and requires almost all of my ready-cash down, 400K, the rest owner financed--rate tbd. he does not want to wait for bank financing.

My other units are older too and I have good local repair guys, but I am mostly worried about paying for heat/dealing with a boiler, the horrendous water/sewer bill and limited wiring. Anyone have experience or suggestions in dealing with these issues. I would get the boiler checked out since I worry it is using a lot of water. Do you think the numbers make sense given these challenges? Taxes and regulations are low in this area.

Thanks!