Posted by Ron Crawford II on July 19, 2001 at 15:06:35:
Aldo,
Thanks for the reply. You kinda lost me on youre reply, however. I don’t understand what you mean by “Both cash flows and earnings must be discounted for your required rate of return.”
I’d like to know if this deal is any good and if so, how should I package the terms and offer?
Need your help!!! -thanks! - Posted by Ron Crawford II
Posted by Ron Crawford II on July 19, 2001 at 12:42:07:
** Here is a deal that I found out about today. Is this a good deal and if so,
what type of terms should I make in the offer letter?
Thanks in advance for your assistance!!! Here we go.
Pharmacist owns the property, used it for office space. He was
recently hired by CVS as a manager and does not have time to operate
the property any longer. The property has been on the market for about
two years and was recently reduced again. His realestate broker told
him that he will have to “carry paper” since this is what investors
will require. He is willing to carry paper. The details:
1 bedroom unit, 2 bedroom unit, 4 bedroom unit and commercial space. All are fully rented.
Tenants pay their own gas, electric and hot water.
Landlord pays water, sewer and trash
$180k asking, $130k remaining on mortgage
Expenses = $10.2k/yr
NOI = $20.4k/yr
These are the caculcations that I made for a potential offer based on what
I learned in a REI course:
$30,672 (Annual income)
$24,537
=$159,490 (Price to offer for the property; or offer $160k)
Re: Need your help!!! -thanks! - Posted by Nick
Posted by Nick on July 19, 2001 at 15:27:29:
Ron,
This is how I would do the numbers. As you know everyone has there own way.
Annual Income: $30,672
Expenses: $10,200
Equals: $20,472
So now you have to get your mortgage payments to be what ever gives you the profit you want. My number would be about $500/mth profit is what I would want. So $6000 profit for the first year.
NOI: $20,472
Profit: $ 6,000
Left for Mortgage: $14,472
Working backwards from here a mortgage of $145,000 at 9% for 30 years would be $1,166.70/Mth or $14,000.43 debt service for the property. As long as you can cover the debt service with the income of the property you are OK.
My offer would be $140K and I would be willing to go up to 145K. If your profit margin is different just do the same calculations with what ever you want for profit.
Remember the deal is only good if you are getting the profit that you want to make out of it.
Let’s look at the 160K offer that would be a debt service of $15,448.75 so you would make approximately $5,000 profit for the first year. Excluding any vacancies. If 5K is enough than the 160K offer is what you should do.
Of course all these calculations are for a no money down deal. If you are going to put money down the numbers change quite abit.
Nick
PS Nice talking to you again and Good Luck
Re: Need your help!!! -thanks! - Posted by Jim Rayner
Posted by Jim Rayner on July 19, 2001 at 15:22:24:
Ron,
There really is not enough information provided to make a good estimate of the value but solely based on the information provided and my default standard criteria this deal would not even make it past my first screening unless the asking price were some where in the range of 105K to 138K. This is just another retail priced deal… even with the possibility of a seller carry back.
Re: Need your help!!! -thanks! - Posted by Aldo Rabih
Posted by Aldo Rabih on July 19, 2001 at 14:40:28:
Your valuation skills - although o.k. are not necessarily fixed. You must remember that Real estate is valued differently by different people.
Consider why you want the property and how it will affect your taxable situation.
You can value based on Earnings, Land values and cash flows. Both cash flows and earnings must be discounted for your required rate of return.
al