I made a bonehead math error. I should have been dividing the expenses into the income and not the price.
but understand this: 40% is a very reliable expense load for you to use, but it DOES NOT include management fees, owner-paid utes or landscaping stuff. just the basics: taxes, insurance, repairs, maintenance and vacancy.
if the rent figures you have offered up are “scheduled rents” (meaning max potential rent assuming no vacancy), then sticj to your 40%. if the rent numbers are actual collections, you need to drill into the detail a little.
first, compare the actual collections with the max scheduled rent. In my 9 years in East TX, my collection factor hovers around 85% of max. I don’t bother computing vacancy rates. a better meaure is the collection rate. this will account for no-pays, slow-pays, partial-pays and empty units.
and if the rent numbers already incorporate a reasonable-looking collection factor, you can back off the 40%. But 85% collection is pretty good in my experience.
I am looking to buy a 4 units apartment building, each 2 bedroom, 1 bath. The location is very desirable and I live not far from the property. Here are the details of the deal:
Asking price: $1,350,000
Annual expenses provided by the broker: $24,595
Annual income provided by the broker including the income of $720 from the laundry: $86,652
This is a 2 story structure built on late 1950?s; the parcel is 7,480 SF with 3,372 SF rentable. All units have their own carport parking and there is one on-site laundry facility. Landlord is responsible for paying the water bill and other utilities are paid by the tenants.
The units look in good conditions and the roof was replaced last year. The listing brokerage offers a financing of 75 LTV at 6% over 30 years. They haven?t listed any information about the vacancy rate however, I am familiar with the area and the vacancy is almost none-existent. The comps of the recent sales in the area provided by the broker supports the asking price but that doesn?t mean much.
I have used the formula that Mr. Alcorn has provided in his article on commercial property valuation, assuming the financing terms provided by the listing broker and considering 4.7% cash on cash the property valuates around $950K.
I was thinking to start the offer around $950K and perhaps to end around $1,100,000.
Please dissect this deal and let me know if you need more information.
first, your gross annual rents are 6.36% of your purchase price. that is just ahair higher than your cost of borrowing. you’re gonna be in a massively negative cash flow position for as long as you own this property, even if you buy it all-cash.
second, the broker is not being honest about the operating expenses. request the tax returns for a more realistic view of things. he’s representing a 1.8% operating expense load. HA !!! that’s a joke. you should expect your expense load to run 40% of gross rents. I’m talking about repairs, maintenance, property taxes, insurance, and vacancy. any utilities you have to pay are not included in this load. nor is landscaping/lawn care, etc.
compare this to a 4-plex in East TX (where I do biz). renovated. fully occupied at $375 per unit. 3400sf. $130,000 is all my market will support for such a property. now compare the numbers. I’m getting twice as much rent for my capital. I have four of these 4-plexes, all with similar numbers.
Thanks for your feed back Jimmy, I agree the purchase price is rather high but wondering how you came up with 1.8% figure on the operating expenses? I keep coming up with 28% when dividing expenses by the income. The $24595 annual expense based on the break down from the broker includes taxes, repairs, maint, mgmt fee, water bill and so on. Of course if I go forward with this deal, I will ask for the owner’s or the holding LLC tax return and check the records.