INVESTMENT ADVICE - Posted by carter

Posted by carter on December 26, 2000 at 19:09:41:

Bill W.,

Thanks for the information. Your assistance will prove to be of great value.

INVESTMENT ADVICE - Posted by carter

Posted by carter on December 24, 2000 at 20:56:47:

I am interested in an investment property but have some reservations about whether its a wise investment.

Location: Baltimore City
Type of property: 3 bedroom Duplex
Price: $159,000
Occupancy: 1 year lease on one unit, while the other is being used for show by the selling agent.
Monthly rent: $900
Gross Income: $21,600
Property Expense: $7,143
NOI: $14,060
Offer price: Considered $155,000 with $10,000 down

Would this be a wise investment?
What is the minimum return to expect in an investment property?
Do you think that the rents are to low? If so, I could only collect higher rents on the vacant unit because the existing tenant has one year lease. In addition, I have not compared the rents in area to determine if it is possible to recover higher rents.

Your advice would be greatly appreciated.
Thanks Carter

INVESTMENT ADVICE - Posted by Bud Branstetter

Posted by Bud Branstetter on December 26, 2000 at 14:11:18:

Since it is free advice you’re welcome to take it or not. Do not but a property that you have to analyze to determine whether you should or not. It’s great for the investor that has more money and doing multiple units.

Look at the property to see if you can make your profit going in. Either a discount from FMV or terms that are favorable. I don’t mind getting a new loan or paying cash if they want to sell to me at 65-70% of FMV. I’ll still want a discount, though less, if I get owner financing.


Posted by BillW on December 25, 2000 at 10:54:42:

In my opinion, this deal looks bad for the following reasons:

  1. One unit used for show by the realtor? What kind of hustle is that? That’s just a way of saying one unit is vacant. If you have any interest at all, find out why it’s vacant and fill it up.
  2. Gross income- 21600 is a projected gross with both units full. Also no allowance for vacancy, and you’ve got a 50 percent vacancy factor right now!
    3.Property expenses seem low. Typical expenses run 45 percent or so, this one is considerably less than that. Why? Sellers have a habit of leaving out certain items like management, lawns, etc. that they “do” themselves. You may not have the luxury of leaving these expenses out. Even if you do them yourself, you should pay yourself for doing them .
  3. NOI of $14060- Again, way out of line considering low expenses and no vacancy allowance. I think $10,000 would be closer.
    5.Offer price - looks too close to retail. Besides, even with a NOI of $14,060 as seller indicates, I don’t think that amount would be enough to cover the payments on a $145K loan. This would put you into neg. cash flow even with 100 percent occupancy and low expenses.
    Unless prices are advancing to the extreme, I would look at this deal more closely.

Re: INVESTMENT ADVICE - Posted by Tom-Ca

Posted by Tom-Ca on December 25, 2000 at 24:42:27:

Invest in a comprehensive real estate analizer.
there are a few of them out there. The one I have is Propvest Gold, by Formation Technologies. You do need excel 97 or higher to run the program.
It will tell you most everything you need to know about any property you are looking to buy as an, IRR,after tax and pre tax profit,sales net after holding period. You can input any variables you want, inflation, rents now and later, it goes on.
It is an powerfull adjunct to making a informed decision on a investment.

Re: INVESTMENT ADVICE - Posted by carter

Posted by carter on December 25, 2000 at 13:07:28:

Bill W.,

Thank you for this dialogue. As a matter of first impression and preliminary analysis, I found the property would produce a de minimis return on investment. The amount seems to be at a level of concern because any unforeseen circumstances (e.g., capital improvements) under property expenses would create a negative cash flow. I’m a first time investor, and your comments have provided confidence in my ability to assess worthy investments. I revised the analysis to include my own charge for management and lawn expenses and here are the results. FYI

Asking Price: 159,000
Considered Offer Price: 150,000 (10,000) down
Scheduled Gross Income: 21,600
Vacancy and Credit Loss of 7%: 1,512
Operating Income: 20,088
Less Operating Expense: 7,643 38%
NOI: 12,045
P/I: 12,031
Cash Flow: 113 1% ROI

I called the broker to set up a meeting to discuss my concerns with this property and why it?s not a wise investment from my standards. I know that its not necessary but I hope that this discussion would help bridge the gap between what I want out of an investment property and what he might have access to through his multiple listings. My analysis indicates that the investment is only giving me a return on investment of 1%. I would receive a better return through the use of a savings account. My goal is to find an investment property that has the minimum potential of 10%. It’s quite possible that a ten percent return could be accomplished through increase rents (i.e., 900 to 950 per unit) producing 22,800 in annual income. However, I have not done any comparables to determine whether the market would allow this charge (TBD)(the location is great because its residential and near a local university).

Bill I have a couple of questions with regard to your valuable comments:
1.) What % range would use for expenses?
2.) What is a reasonable % for vacancy and credit loss?
3.) What % is considered reasonable for NOI?
4.) What is considered a reasonable % for management of property? I was very conservative in my analysis, which means that expense would put in the read for certain.
5.) How important is the capitalization rate?
Thanks Again,

Re: INVESTMENT ADVICE - Posted by carter

Posted by carter on December 25, 2000 at 10:03:55:

Thanks for the information. I will look for the program this week.

Re: property analysis - Posted by BillW.

Posted by BillW. on December 26, 2000 at 17:51:34:

To answer some of your questions:
Please note: these are just my personal opinions.
1.I would recommend a least 35 percent minimum and in many cases 45 percent.
2.Vacancy and credit losses will depend on your skill at keeping units full and at collecting. I would use 5 percent minimum if you’re in a good area and 10 percent if not. Some special cases will have practically zero percent and some 30 percent. It depends on where you’re at and your ability. As a beginner, however, I would use at least 10 percent, because you will make some mistakes.
3. Just subtract operating expenses and vacancy and credit losses from scheduled gross income. Should probably be 50-55 percent. A little higher if you’re lucky or real good. Don’t forget, your mortgage payment will come out of NOI, not operating expenses.
4. I have seen ranges of 5 percent to 20 percent. You’ll have to check with some local management companies to see what they offer. Also, check their reputations out real good. It doesen’t matter if they do it free if they do a poor job.
5.Cap rate is is basically a number that tells you how long it will take to return your investment. A 10 percent cap rate will get you paid back in 10 years.(Not to be confused with internal rate of return). It’s useful to compare with alternate investment strategies to see if your risk/reward balance is OK. For example, I can get 6 percent money market right now and probably 8 percent in bonds without too much risk. I’m going to want more if I invest in rental property to offset the additional headaches and risk. Depending on the quality of the property and the tenants, possibly as much as 15 percent.
As a further note, if you go to the Commercial REI section on this site (top left corner of the main page) and click on it you will get a submenu. Click on investment analysis-due diligence by Mr. Ray Alcorn. This gives as good a review and information as I have seen. Far more detailed than what I can discuss here. Check it out.