property analysis

[JessHunt]

This is the first property I`m buying as an investment property, and have been struggling with the due diligence. Any insights would be greatly appreciated.

Property is a 4-plex in a neighborhood in Red Deer that Don recommended on our bus trip. It is presently rented as follows:

4 units having 2 bedrooms and 2 floors each. 3 renting at $800 and one at $950. Rents are behind and owner is prepared to raise rents on the 3 to $875 immediately. Small pets are allowed and it is difficult to find rentals that allow pets, so will not likely present a vacancy problem.

Price: $520 000

The following figures are based on a ytd income statement provided by the management company, and all figures X 1.5:

Revenue: 36 967

Expenses:
Cleaning: 396
R & M:

 

[JessHunt]

I think I hit the wrong button and posted this before I was finished. Now I`m finished, and have possibly answered my own question. Helps to put it in writing. But instead of assuming, I would appreciate your feedback.

This is the first property I`m buying as an investment property, and have been struggling with the due diligence. Any insights would be greatly appreciated.

Property is a 4-plex in a neighborhood in Red Deer that Don recommended on our bus trip. It is presently rented as follows:

4 units having 2 bedrooms and 2 floors each. 3 renting at $800 and one at $950. Rents are behind and owner is prepared to raise rents on the 3 to $875 immediately, and to make up the shortfall himself. Small pets are allowed and it is difficult to find rentals that allow pets, so will not likely present a vacancy problem.

Price: $520 000

The following figures are based on an 8 month ytd income statement provided by the management company, and all figures X 1.5:

Revenue: 36 967

This revenue figure, compared to present rents, indicates a vacancy rate of 6% in ytd figures.

Expenses:
Cleaning: 396
R & M: 3444
Utilities: 3011
Outside Maintenance: 827
Admin: 4087

Also, according to a pro forma provided by the RE agent:

Taxes: 4113
Insurance: 800
Advertising: 100

Total Estimated Expenses: 16778

Profit, net of debt servicing: 20189

Closing Costs estimate:
Inspection: 630
Legal: 2000

Total Cost: 522630

20% down: 104432

Mortgage: 418198; Payments: 1610 x 12 = 19320

Annual Cash Flow: 869, which is somewhat less than 1% ROI

This hardly seems worth it except for the following:

Recommended neighborhood in Top 10 Town
Suited units
Some superior features, such as well-built 1973 building, wide doors, etc.

Down-side: roof must be replaced in 3 - 5 years, all w/d`s must be replaced, 2 carpets

Is this worth considering?

Thanks for your feedback.

 

[GarthChapman]

A few questions that come to mind:
1) What does the over $4,000 in Admin costs represent?
2) Have you completed the REIN Analyzer for this property?
3) Does this take you closer to your goals (a key question in that analysis doc)?
4) Did you stress-test this property (ie with higher vacancy, say 12%, and with higher interest rate on the mortgage, say 6% - you used an interest rate of 3% in your figures. How would feeding that negative cash-flow work for you?
5) Are you aware that when looking for your next purchase the lender will assess their calculated negative cash-flow against your income, and generally speaking won`t likely view you as an astute investor, unless all your other properties cash-flow.

Hope that helps a bit,

 

[JessHunt]

QUOTE (GarthChapman @ Oct 4 2009, 03:18 PM) A few questions that come to mind:
1) What does the over $4,000 in Admin costs represent?

These are the 8 month ytd figures, which I multiplied by 1.5

Admin - Management Fees: 1288.83
Office - Misc: 121.39
Office - Courier: 14.6
Office - Long Distance: 27.51
Leasing - Ad: 1244.96 (does that sound pretty high?)
Bank Charges: 15.00
Tenant Deposit Interest: 6.01
Total: 2724.65 * 1.5

2) Have you completed the REIN Analyzer for this property?

Got busy posting this question and I see I didn`t finish it - will do so. Or is it a waste of time after answering your astute questions below?

3) Does this take you closer to your goals (a key question in that analysis doc)?

My goal is to quit working on my 60th birthday, 20 months from now. Good question. Definitely not.

4) Did you stress-test this property (ie with higher vacancy, say 12%, and with higher interest rate on the mortgage, say 6% - you used an interest rate of 3% in your figures. How would feeding that negative cash-flow work for you?

Yikes! Only if I want to still be working when my grandchildren retire.

5) Are you aware that when looking for your next purchase the lender will assess their calculated negative cash-flow against your income, and generally speaking won`t likely view you as an astute investor, unless all your other properties cash-flow.

If the answers to the last 2 haven`t convinced me this one would. I think it would be a good idea to keep looking.

Hope that helps a bit,

A bit? It helps enormously! Thank you so much!

 

[invst4profit]

This looks like a terrible deal to me. On a income property at $520,000 your monthly rent should be close to or better than $5200/ month. As far as the upside of a top 10 area or a solid structure is concerned those points are not relevant to a bad deal.

I would not even consider a deal with these numbers or with utilities included. Plus the owners numbers are probably on the low side.
Considering this is your first deal I would be very concerned it could turn out to be your last.
Pass on this and wait for a really good deal.

 

[JessHunt]

Thanks for your feedback, Invest4profit

Until I posted this it looked like too good a deal to pass up, but your point that the good features are irrelevant is too true, and you may be right about it being my last, and the nightmare I joined REIN to be sure I would never invest in.

 

[Thomas Beyer]

too expensive as a rental 4-plex unless PRISTINE and condo convertable due to size of units and area of Red Deer.

too expensive as a rental property .. unless rents can be sustained at $1200/month .. can they ?

 

[JessHunt]

Thank you, Thomas, for that insight. I see that this was an expensive mistake, as I already paid for an inspection, and forgot to use the very first filter. 520 000/12/10/4 - a simple equation which I overlooked while focusing on irrelevant factors. Expensive, but not as expensive as it might have been if I hadn`t sought the advice of knowledgable REIN members.

Back to the drawing board . . .

 

[jonathanpenner]

Am I understanding correctly? You are saying that unless the gross rents are at least 12% of the purchase price, it's not a good deal?



If so, is it even possible to find a "good deal" in areas like the Fraser Valley, (Surrey, Abbotsford) Edmonton, Calgary etc.



In Surrey or Abbotsford I find it hard to find anything that even comes close to 8% never mind 10 or 12%. Where can you find income properties like that?

 

[Rickson9]

Speaking for myself, that's a terrible investment with a very bad yield. I would avoid it.



edit: late to the party. Good advice already posted here.



Best regards.

 

[Thomas Beyer]

[quote user=jonathanpenner]Where can you find income properties like that? Everywhere .. but you need a wide network of deals/realtors ..



Where else can you get a decent yield in the 10-12% range [counting mortgage paydown + slight equity/rental upside], with almost no risk ? Gold ? ETFs ? Stock market ? corporate bonds ? That's why sellers are so reluctant to sell at a CAP rate of 6% or 7% or 7.5% which would be a gross yield of 10% or 12% or 15% assuming roughly 50% of rent is expenses !!



True CAP rates are 5% or so counting real vacancies and expenses, in most healthy markets like Red Deer, Edmonton, Calgary, Surrey, Victoria, Regina, Saskatoon, Winnipeg, GTA, ...



Therefore, to get higher returns you must go to smaller towns with more risk: Grand Prairie, Kelowna, Barrie, Campbell River, .. or into "the hood" of GTA or Edmonton or Saskatoon or Winnipeg .. i.e. run down, bum infested, social housing concentrated, socially low class neighborhoods with its own rent collection and property condition issues !



Also to consider is the sales process, controlled to a large degree by a handful of competent realtors in each city: multi-family realtors (or most commercial) have this "hierarchy" of buyers:



Tier 1: folks like Boardwalk or Mainstreet or REITs that can buy in cash

Tier 2: folks like us or similar large investors / syndicators / private investors that have proven they can close in a certain niche, with cash + mortgage and don't walk after 3 months of due diligence

Tier 3: their long list of contacts (several hundred to several thousand, depending on realtor)

Tier 4: MLS - everyone else



Most commercial realtors like to keep the full listing commission, if possible. So they shop their own list first, in priority. Then, if it hasn't received an offer, after a few weeks, it goes to "the world at large".



Therefore, build a list of contacts in your target area and tell them specifically what you want to buy and what you can afford. Don't BS them too much as they will realize pretty quickly if you're a closer or not. Realtors like to sell, not handhold potential buyers that are fickle.

 

[johnsu]

Hi Jess,

The numbers don't lie, and the only illusion is the one we set upon ourselves. Something I've learned in Real Estate is "buying is EASY" The real skills comes in managing and maitaining the asset. I always plan for 5 years minimum and if things work out better sooner great. But I don't set unreasonable expectations on Real Estate. Long term wealth and like what Don' says "Don't bring a Short term investing mindset into a long term investment" That's when investing becomes B-A-N-A-N-A-S!

 

[jonathanpenner]

[quote user=ThomasBeyer] ...Therefore, build a list of contacts in your target area and tell them specifically what you want to buy and what you can afford. Don't BS them too much as they will realize pretty quickly if you're a closer or not. Realtors like to sell, not handhold potential buyers that are fickle.




Thomas, thanks for your response. I realize I have been confusing the GRM with CAP Rates. Also your comments in regard to the hierarchy of buyers was a helpful reminder.