Analyze This! 7 units $83K! - Posted by Ron M

Real Estate Investing
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Posted by Ron M on November 07, 2002 at 01:06:12:

Kristine,

Actually, I’m also running up against the identification deadline of a 1031 exchange as well. I have the cash in a trust account and if I don’t reinvest will have to pay short term capital gains.

One of the things that attracted me to this deal, even though the cash flow isn’t great, is the building would be paid for free and clear in six years. Raising rents over the next 6 years and then having it paid for should equal some pretty good income then, don’t you think?

I did receive a counter offer today. The buyer wants 24K down and for me to take over the existing financing. Any other thoughts?

Thanks for your input.

Ron M (WA)

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Analyze This! 7 units $83K! - Posted by Ron M

Posted by Ron M on November 06, 2002 at 10:07:03:

Hi Everyone,

I made an offer 2 nights ago on a 7-plex apartment built in 1904.
It was listed originally at $117,800 and then reduced to $107,000. The building needs some work (a roof next spring will cost around $12,000), 2 of the bathrooms have soft floors and will probably need to be cut up and replaced (estimated cost $2,000).

Rents are $2,290 when fully rented. Currently 1 vacancy, but when I looked at this building 5 months ago it was fully rented. A couple of the tenants have been there for several years, but all tenants are on a month-to-month rental basis.

I found out yesterday that the 1st mortgage on the building is a non-qualifying assumable (original terms $110,000, 10%, 16 years first payment of $1,141.00 beginning on September 18, 1992). According to the agent this leaves approximately $63,000 principle balance on the loan. There is an amendment to the original Promissory Note which states ?In the event the property is sold or in any way transferred, the monthly payment shall be reduced to $1000.00 per month? All other terms and conditions remain the same.? I believe this means if they reduce the payment to $1,000 per month at the end of the term there will be a small balloon payment of around $10,000 due on or before October 18, 2008.

The agent for the seller spilled the beans that the seller will accept $20K - $25K plus allow me to assume the loan. We wrote an offer on the property for $83K purchase price with $20K down and 20K in earnest money. We put it contingent upon us finding satisfactory insurance and seller financing. Now I need to do my due diligence to see if this is the right deal. I put the huge earnest money down so that the seller would have to kick back a lot of money if they turned me down.

The GRM (Gross Rent Multiplier) is 3.02 not considering the new roof that will have to be put on next Spring or the bathrooms that will have to be remodeled this next year. Because I?m not sure how much insurance will cost me, I don?t know what the Cap Rate is. There are 2 buildings on the same parcel; the main one for 5 of the apartments has a central heating system with annual fuel around $4,100. Property taxes are $2,000 annually, Annual water is $700, and the seller says the annual insurance is only $632. In fact all these figures have been provided by the seller. The tenants do pay their own electricity, and the duplex unit on the property has separate gas heaters in each unit. Oh and by the way, 5 of these units come furnished.

With an initial outlay of $20K to do this deal, the only monthly payment is $1,000. leaving $1190/month to handle the expenses. I did notice the old style of thermostat on the gas heat and figured I could put a computerized timer to decrease the fuel usage by turning down the heat at night and putting a locked box over the thermostat so the tenants wouldn?t have access to it. Also, I believe I could raise the rents about 10% since the heat is included.

Looking for advice on this one. I moved too slowly on a 19 unit building a couple of weeks ago and lost it to another investor. This one is tied up and now it is up to me as to whether or not to go through with it.

Thanks to all who reply.

Ron M (WA)

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Re: Analyze This! 7 units $83K! - Posted by tyler

Posted by tyler on November 06, 2002 at 15:03:32:

Due you due diligence. $700 annual water bill =$58/month on 7 units? verify with water co. Insurance annual bill of $632. You won’t get this rate -you;ll be lucky for $1100. verify all the bills. email tim if this is same deal -he has good advise, be careful- i wouldn’t hand over 20m in escrow.

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Re: Analyze This! 7 units $83K! - Posted by Tim Fierro

Posted by Tim Fierro on November 06, 2002 at 12:41:58:

Ron, is this the one in Aberdeen, owner has been trying to sell it for the past 2 years, on 1st St, all 1 bedrooms & a duplex?

I can’t remember what city your from but I was thinking you were over near Hoquiam/Aberdeen area.

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Re: Analyze This! 7 units $83K! - Posted by Kristine-CA

Posted by Kristine-CA on November 06, 2002 at 10:51:37:

Ron: I’m a wholesaler, but I’ve been looking at similar deals to yours to flip to rehabbers and investors. So take my commentary with a grain of salt. It is based on my experience with rental investor/buyers in my area.

It doesn’t look like a great cash flow property. The repairs alone that you know about now will eat up your cash flow. Let’s say debt service is $1000K per your understanding of the loan assumption. The seller’s expense list for utilties, taxes, and insurance at $7500 per year, which is $625. So you are up to $1625. The list did not include any grounds maintenance or repairs. And what about vacancies?

The $14K in necessary repairs that you mention has to amortized somehow because the money came from somewhere–even if it is from your own savings? 14K over 5 years no interest is $235 per month. And what about painting and cleaning and floor coverings over the next few years. And that is if nothing else goes wrong.

Seems like hardly any room for cash flow, especially when you are talking about 7 low-rent units. That’s seven toilets and seven bathroom sinks and seven kitchen sinks and an old heating system and an old plumbing system for $20K down. How much more would the property re-sell for if it were fixed up in the area? Are the rents too low, (more than the 10% you mention) by any chance? Perhaps there is equity there that I don’t understand.

Why make the seller’s problem yours? Why should he get 20K? If it were me, I would offer to assume the loan and give him whatever he needed to walk. Even then, I’m not sure I would want it unless I could get better rents over time.

Remember, the agent isn’t really spilling any beans. He’s telling you exactly what he wants to in order to get you to make an offer. Don’t make your offer based on his comments. Make it based on your goals.

Sincerely, Kristine

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Re: Analyze This! 7 units $83K! - Posted by Ron M

Posted by Ron M on November 07, 2002 at 01:12:04:

Tyler,

You are correct, in fact the insurance quote came back between $1,900 & $2,000. Washington State has got to be one of the toughest states to get insurance in for older buildings. Or have you found that the case where you live also?

This isn’t the same deal Tim was discussing, wrong state.

By the way the seller countered my offer at $4K more on the down for a total sell price of $87K. One of the primary reasons I was interested in this arrangement is because the building would be paid for “free and clear” in six years. Also, in six years with rent increases from year-to-year the monthly cash flow would be substantial (after the building is paid off). Is my thinking flawed? I am up against a 1031 ex deadline, do you think I can get a better return on investment in a different type of property?

Like Ross Perot from your neck of the woods says, I’m all ears.

Thanks,
Ron M (WA)

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Re: Analyze This! 7 units $83K! - Posted by Ron M

Posted by Ron M on November 07, 2002 at 01:02:36:

Tim,

No this isn’t the one in Hoquiam/Aberdeen area. Actually there is a 2 bedroom and 6, 1 bedrooms.