Posted by IB (NJ) on July 07, 2007 at 21:06:20:
Hey I’ll be taking a small vacation to Tulsa (family living there) next month and plan on checking out the real estate market for residential deals. Anything you can tell me about the RE market there? I think I heard that’s it’s appreciating (as opposed to the re markete here in NJ). Thanks.
Ib
whats wrong with this deal?? - Posted by Jeff
Posted by Jeff on June 16, 2007 at 21:55:55:
All,
I purchased Rayâ??s book several months ago, have only read it twice (4 highlighters worn out), and am working up the courage (and money) to do my first commercial deal. I have been watching the local market for a couple of years now and am learning what makes and doesnâ??t make a good dealâ?¦ but this one has me stumped.
7 1bedroom and 16 2bedroom apt building built in 1940 with most units newly renovated to B or C condition (supposedly section 8 approved)
Asking $600,000 (owner claims it is worth 750,000)
Gross Income $117,900
Expenses (24%) $28,300 (includes a 3% mgmt fee)
Vacancy (25%) $27,100 (apparently they emptied the building to renovate it)
NOI $62,500
Lets assume I can 1)negotiate it down to $550,000, 2)finance 80/20 at 8.5% for 20 years, 3)want 15% on my money.
That (correct me if Iâ??m wrong) gives me an indicated cap rate of 11.36% and an indicated Max Price of $559,000. Cash flow is about $17,000.
It is on the edge of a rough part of town. Two blocks behind it are two burned out crack houses and four blocks the opposite direction is a multi-million dollar downtown revitalization project. It is within 6 blocks of a college campus and has three churches within site of the building. The building is old (no A/C) but seems to be in good shape (I have been in several units) without any large outstanding maintenance needed.
My questions to the experts are:
Why has this been on the market for so long (+6 months)?
Would this make a good â??starter projectâ?? (I have about 99% of the down payment saved up so I donâ??t have a lot of cash to burn after the deal is done). I am gainfully employed and out of town every other week but available by phone.
Thanks in advance
Re: whats wrong with this deal?? - Posted by mikbarlow
Posted by mikbarlow on June 28, 2007 at 18:14:32:
You will lose at least $10,000 instead of making any cash flow.
Expenses will be about $53,000.
Re: whats wrong with this deal?? - Posted by Ferris Anderson
Posted by Ferris Anderson on June 27, 2007 at 19:35:10:
Jeff
Before you pass this deal up, I would ask, at what price could this deal work for you? Riches in real estate are made from opportunities others miss. I donâ??t know any new investor who made it big by investing in 4% cap rate properties. Only after you go big can one afford to do that!!! There are really two ways to make fast and good dough in real estate: build brand new, or locate a property that is in an up and coming neighborhood and wait. This sounds like the latter. Two things I would check on. First: learn all the HUD standards for section 8 and see if the building is really up to code. Second: see what the section 8 and government housing demand is for the area. Also check into other social service agencies in the area (i.e womenâ??s shelters, mental health facilities, etc.) they can be a gold mine of renters.
FHA has multifamily loans available that look favorably on projects in tough neighborhoods. These lending programs could help turn this project from a dog to a nest egg. I am a commercial mortgage broker and realtor. If you would like more info on the FHA programs just drop me a line.
Re: whats wrong with this deal?? - Posted by Jeff
Posted by Jeff on June 20, 2007 at 12:39:59:
Thanks for the insight everyoneâ?¦
I think I am going to pass on this one as I think it is a little much for a first time commercial investor. When I asked for rent roll info, they only provided a current tenant list. The expenses were in a very basic spreadsheet with very little info. They just donâ??t seem to be very forthcoming with information (which may be why they cant sell it).
For those of you still interested, here is the Loopnet link
http://www.loopnet.com/xNet/MainSite/Listing/Profile/
Profile.aspx?LID=14984956&SearchID=249073110&
SearchResultID=249073110&ResultCount=4&PageNumber=1&
ItemIndex=4&PageSize=20&OptionType=Search&PgCxtGuid=
d932000e-76f6-4cdb-8d7b-2f005bbcc01e&PgCxtFLKey=&PgCxt
CurFLKey=SavedPropertiesFS&PgCxtDir=Down
(take all of the hard returns out before you paste it in your browser) and if that doesnâ??t work, look up Breckenridge apts in Tulsa, Ok if your interested.
I have worked with Rayâ??s spreadsheet and found that with expenses set at 40% a 10% vacancy factor and current rental rates, I get a break even occupancy of 74%, DCR of 1.45, and LTV lower than lower than 75%. It all looks good on paper .
If anyone has any further input, it is greatly appreciatedâ?¦.
Thanks again
Jeff
Re: whats wrong with this deal?? - Posted by Penny
Posted by Penny on June 19, 2007 at 08:55:05:
I’d ask why the seller is selling - if they just renovated and have 25% vacancy, then there is a lot of upside the seller is losing out on. Why isn’t the seller taking 6 months or so to finish the leasing, then sell a more stable property at a higher price? Ask for the rent rolls from the last 3 years - you might get some good insight from this.
Do you know what the vacancy rates in the area are? How does this property compare?
I agree with the other posters - the 3% management fee looks low, as do the expenses of 24%. On an older building, my lenders assume 40% as a rough estimate. Also, only being 2 blocks from a bad area may be too close for many potential renters.
Re: whats wrong with this deal?? - Posted by Ben - NYC
Posted by Ben - NYC on June 19, 2007 at 06:34:21:
I don’t know your market and don’t know the condition of the property so it’s difficult to say for sure what it going on here.
However, factoring in a 25% vacancy rate seems very high unless this is in a complete war zone, the local economy is really bad, or there is an extreme glut of rental properties available. So while it may be 25% vacant now, you should be able to get those units rented with some time and within a year you should be able to maintain a better vacancy level. This only increases your numbers.
The expenses seems a bit low for that many units, be sure to double check them and don’t skimp on a budget for repairs. In 23 units, even if they have been renovated recently, things will break, toilets will clog, faucets will leak. It’s going to cost money to get someone over there each time so budget accordingly.
Other than that, the numbers look really good. Once again, whether this is a deal or not will depend on your market but this looks like it has a lot of wiggle room for it to cash flow nicely. This will help in case you have to spend a bit more to manage it since you will be out of town from time to time.
One last thing, be sure you have a feel for the financing available. Many banks don’t like the high vacancy rates when they lend.
Good luck
Re: whats wrong with this deal?? - Posted by Berno
Posted by Berno on June 18, 2007 at 20:51:14:
I’m no expert, but:
If it’s been on the market that long, maybe other investors know something that you don’t. I own a couple of SF homes in a ‘rough’ neighborhood and when I get calls on my for rent ads, about half of the time I get an immediate ‘no thanks’ when I give the location of the home. Maybe this place you are looking at is in the same boat.
I’m pretty conservative, and I’ve seen good properties in bad areas go unrented. I wouldn’t think this would be a good ‘starter project’. Since you wouldn’t have any cash left for immediate improvements or unforseen issues, this deal could sink you.
Since you have a full-time job and little time, the management thing would worry me. 3% seems kinda low to me, of course maybe with the 3% they have been getting what they paid for. Getting the property close to capacity would take a bit of work I would guess, and nobody would probably be as motivated as you are to get the units rented.
Just some things to think about, but again, I am no expert. Just a guy with a handfull of SF homes and a bit of experience in the biz.
Good luck!
-Berno
re: Tulsa has great deals - Posted by Pete-NC
Posted by Pete-NC on June 29, 2007 at 13:40:11:
Jeff,
I’m going to look at this, but in the meantime.
You are in a great location for commericial, you can actually buy a property and get a good cash flow. Have you had any investors you know look at this. I bought a small self storage place in that area a while back, it was HORRIBLY mismanaged been on the market for a year C class. But the numbers worked and revenue is up 30% since I bought it.
There was a mobile home park same area same thing. I didn’t get the property but I drove by and was like so where do you rent what’s the number(none posted anywhere), that’s crazy.
Any good hunting,
Pete
Re: whats wrong with this deal?? - Posted by Andy
Posted by Andy on June 19, 2007 at 10:19:25:
Just curious, what part of the country are you in? Dont see alot of 11% cap rate deals in my neck of the woods. If in fact thats a real 11% cap. Like others said, expenses seem low, but i’m a relatively new also compared to some of the pro’s on here.