Posted by Tim (Atlanta) on June 28, 2001 at 12:52:40:
First of all, value the property based on it’s current rents, NOT what you think it will rent for when fixed. If the rents are under market, fine, you can change that later and make more cash flow. NEVER value the property based on raising the rent rates. Below market rents can be an incentive to look at a deal, but they should not determine what you offer for the property.
Now let’s look at the 4-unit. Gross Rents of $25800, expenses of $11910. The expense ratio is 46%. That sounds a little high. Are any of the utilities included in the expenses? You mention lots of deferred maintenance. How did the owner come up with high expenses and lots of deferred maintenance? Just doesn’t seem to make sense to me. If you take those figures, you get a NOI of 13890 per year. Using the $150,000 price, the CAP rate is only 9.26%. That is a little low for my taste. You may be different. For the cash flow, you will get $13,890 per year for debt service. That is $1157.50 per month. If you were to get a 30 year, NOO mortgage at 8%, payment is $823.11. This doesn’t include the 20% that the owner carried back in paper. You would need to make that payment as well. And my figures don’t take into account the repairs you need to make. How will you pay for those? It sounds to me like you will end up with a negative cash flow for the long term on this deal. I don’t think that would change even if you L/O it from the owner for 6 months, then get him to carry the paper. The price is simply too high to justify the cash flow. My vote on the 4-unit is PASS.
On the 2-1 house, maybe you could to a sandwich L/O there. Offer the home for sale to an owner occupant on a L/O agreement. Lease it from the current owner at say $400 on a purchase price of 60K, then sell it on a L/O for $600 on a purchase price of 70K. You get $200 in monthly cash flow, and a 10K payday at the end.
