4 unit building - Posted by Scott

Real Estate Investing Real Estate Law
#1

Posted by luke on December 04, 2006 at 21:03:00:

Here are a couple ideas:

Where would I find a good insurance estimate? Call an insurance agent and ask

Additionally, how do I find what taxes will be? Call the tax assessor and see what the current taxes are and see if the re-assess on purchase and figure out what it will be.

Where can I get some rent comps to understand what the market supports?
Knock on doors and do a rent survey or call a few property managers and ask them what things are going for in the area. Be aware though, they may inflate the nubmers to try to get you to enlist their services.

Is it a % of collected income? Generally 6-10%, geographicaly dependent. Once again, call a property management company and ask.

Any suggestions on how to finance this? Call a couple mortgage brokers.

Don’t forget about repairs in your cash flow.

Good Luck,
Luke

#2

4 unit building - Posted by Scott

Posted by Scott on December 04, 2006 at 20:51:37:

I am new to the RE game. I am looking at a 4 unit building in Missouri and the seller is providing me with current rents. I am trying to get to a true cash flow before financing number. Where would I find a good insurance estimate? Additionally, how do I find what taxes will be? Where can I get some rent comps to understand what the market supports? Additionally, should I use a local management company (since I am on the east coast), and if so, any ideas on what a management company will charge? Is it a % of collected income?

Additionally, I have a very strong credit score and make a good income. Any suggestions on how to finance this? I want to buy income and am targeting cash flow / purchase price of 7.5% (I am calling “cash flow” = rent - vacancy factor - taxes - insurance - mgment fee).

I know this is long, but I would sincerely appreciate your help.

Scott

#3

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.

#4

Re: 4 unit building - Posted by Dons

Posted by Dons on December 05, 2006 at 04:33:37:

The insurance agent who handles your home insurance should be able to give you a rough idea about insurance costs, however he/she might not be able to sell insurance to you on out of state property. You’ll need a Missouri agent for that.

You find the taxes by going online and looking at the county tax assessor’s (sometimes called auditor) website. It is normally listed by address as well as by owner’s name. Or you could just ask the seller for a copy of his current tax bill.

Rent comps can come from the newspaper in the town where the property is located. They also can come from the property management company you hire.

I use management companies for my out of town properties. It does no good for a tenant to call me when there is a plumbing problem or an appliance problem. I’m 1600 miles away. The management companies charge a “set up” fee (usually a fixed amount) to advertise the property and attain a tenant. Then there is a monthly fee…usully around 10%.

How do you find a management company? I’ve done it through recommendation by others or by the RE agent I’ve used. And I’ve done it by searching online as well as Yellow Pages. The personal recommendations worked best.

Don

#5

Re: 4 unit building - Posted by Mike-OH

Posted by Mike-OH on December 04, 2006 at 21:47:29:

Scott,

You are WAY OFF on your cash flow formula. Cash flow is definitely NOT rent - vacancy factor - taxes - insurance - mgment fee. Not even close! Here are a few other expenses to consider: advertising, evictions, entity maintenance, legal fees, court costs, damage done by tenants, maintenance, exterminations, capital expenses, and many, many more.

The number one reason that new landlords fail is lack of cash flow. I suggest doing a lot more study on this issue before buying a rental property.

Good Luck,

Mike