Posted by Jason on January 06, 2004 at 12:06:41:
I found this both hilarious and informative. A few weeks ago, I looked into a similar property and the only questionable thing was the “neighbourhood”. Ray Alcorn said that “the neighbourhood” being questionable speaks volumes. After listening to your story Frank, I feel I am not the only one going thru this. Not that I am glad that you or your New Jersey friend went thru some hassles, but just feel that I am not the only one.
Am I missing something? - Posted by Kevin in NY
Posted by Kevin in NY on January 05, 2004 at 23:18:51:
I am new to RE investing. I am currently looking at a fully occupied six unit apt. building. The selling price is listed at $67,500. I calculated the the ROI at 114% and the Cap rate at 21.6%. The building was built around 1900. I live in a different state from this property. Barring any major inspection problems. This seems to me to be a good investment, am I wrong? What advice can you offer me? Also is there a good book to read for this type of investing?
Thanks in advance
Kevin
Re: Am I missing something? - Posted by Thomas Mote, CPM
Posted by Thomas Mote, CPM on February 16, 2004 at 17:25:03:
Kevin:
Not sure if you got the info you were looking for or got scared off. There are some pretty large gaps in your numbers, and I would be glad to help you with some basic considerations.
For example, are you going to offer rent reduction to a tenant to help serve as onsite manager? How to get rents paid, evict when necessary?
I have not ever seen an apartment with a yield of 114%, but then most of my stuff is in Texas! I have seen office buildings with yields like this, but these were bought at auction with VERY low basis, and fixed up from there creating very strong cash on cash returns. Is it possible you are not including all of the property tax, utility and repair/maintenance data in your NOI calculations?
Glad to help if you are still in the hunt.
Tom Mote
Re: Am I missing something? - Posted by Frank Chin
Posted by Frank Chin on January 06, 2004 at 11:54:55:
Kevin:
Since you asked, here are the things missing:
1- Is it in a war zone, where deal dealers roam?
2- Are all or any tenants paying the rent on time?
3- Any violations, or any major expense needed to bring the building up to code?
4- Any management company willing to manage such a property, which is on the smallish side.
I live in Queens, NYC, and a friend bought a place in Jersey City which showed very high returns. He reasoned that he can run over to Jersey City at night after work from Manhattan if any problems came up.
You have to realize that for old, functionally obsolete properties (especially from 1900), you’re renting to low income, and/or low class tenants. Being ethnic Chinese, he rented to students from China.
To begin with, the plumbing and electrical was working, but not in best of shape. The basement floods after rainstorms and affects the electricity.
His newest tenant had a beef when he found out he paid rent higher than the others, and he didn’t want to hear anything about why the longer term tenants paid less. To protest, he kept his windows open in winter, and turned the hot water on when he goes out, so the building lacked hot water.
Before my friend came after him, he called the authorities to lodge heat and hot water complaints, among others, and had violations issued. Not only that, he whipped the other tenants into a frenzy.
My friend was so tired from driving to Jersey City after work, especially in bad weather, that he was looking to sell the place for even less than he paid for it.
I also looked into similar properties in Springfield MA, but asked about many building nearby that were burnt out. I was told local landlords were spared, but tenants took to setting fires to buildings of “out of town” landlords that didn’t respond quickly enough to complaints.
The new mayor also put a squeeze on “out of town” landlords as drug dealers hung around such buildings. He threatened to seize the buildings unless landlords cleaned up the place, i.e. chase the drug dealers away.
One elderly owner, who retired to sunny Florida, returned to hang out around his decrepit buildings, to help out on the mayors year on drugs, since the management companies seemed unable to control the dealers.
I haven’t found a good book yet about slumlording. But my brother in law tells me that he doesn’t hear constant gunshots like he used to in the downtown Springfield MA, area at night since the creackdown.
Frank Chin