Re: 4 unit building - Posted by GL(ON)
Posted by GL(ON) on December 05, 2006 at 12:10:38:
If you are a serious buyer the seller should provide all the financial information. Rent, taxes, insurance, and all other normal expenses.
You shouldn’t believe him. You should check out the taxes at the courthouse, the insurance with his insurance agent etc.
But with a little practice you will know when something makes sense. For example around here the insurance on a 4 plex will be about $1600 to $2000. If he says it’s $400 that throws up a red flag. If it’s true, the place is woefully underinsured. You will be buying new insurance anyway to reflect the increase price, and to protect you from the mortgage company.
On the rent, you should know this. It’s part of your “product knowlege” to read the newspaper ads regularly, talk to other landlords and generally keep up on this. Read the ads and if necessary go and look at some apartments to find out what similar places are going for. You can bet your prospective tenants will do this and appraise every rental as if they were auditers from the IRS.
As a rough guide figure 40% to 45% of the gross income will go for expenses. If you do your own managing you can cut this to 35% or even 30% if you do your own repairs.
There are dozens of ways to buy with low or no down payment. This allows you to buy more with the same capital and is a good way to go provided you have positive cash flow and keep on top of managing, or have a good management team.
There are lots of books like “Nothing Down” by Robert Allen or Carleton Sheets’ course that will teach you how to make offers. The secret is to find out what the seller wants and give it to him. There are lots of ways of doing this without the money coming out of your pocket.
If you plan on using a management company think of the smartest people you know who own rentals or are involved with rentals. Could be an experienced investor, lawyer, accountant etc. Ask them who they use and who they recomment.
Figure 5% to 7% of gross rent for management meaning paperwork, renting apartments etc. and the same for maintenance meaning cutting grass, replacing light bulbs and faucet washers etc. Big budget repairs like a new roof are normally amortised over time, your accountant can help with this.