Multiple Single Rental Unit Purchases
I have come accross a possible purchase of nine consecutive townhomes. All nine are currently rented with staggered lease expiration dates throughout the year. One lease expires this month and no indication of whether it has been renewed. Here are the questions I've asked and answers I've received:
1. Why selling? Ownership group owns appx 100 units and were looking to unload some. (Not sure I buy this explanation. Seems odd to sell 9 when you already own 100)
2. How much would they accept all cash? Could not answer.
3. Any mortgages? Assumable? Homes owned free and clear.
4. Owner Financing available? Not sure.
5. Total rents? 68,100/yr (appx 100-150 below market rate per month per unit)
6. Mgmt company fees? 5%
7. Maintenance records/tax assessments/payment history of tennants available? I was told to contact the mortgage company.
8. Comparable sales in area? 95-100k for comps (have not verified yet).
Is there anything I need to ask or direction I should look in to decide on an offer that is fair to the owners and to myself. I don't have a lot of cash to put down (about 10k).
I checked out the pro forma site and based on the numbers could only offer them appx 60% of their asking price and still make it a profitable rental deal.
My current exit strategy would be to offer the tenants three options.
1. Lease option.
2. Two yr lease w/ reduction of rate.
3. One yr lease at full price.
Haven't determined whether to use a management company or not? + or - of using property management?
I am the ultimate newbie at this having never purchased a rental unit. Figured why not dive into the deep end. Any help from those w/ experience would be greatly appreciated. I'm sure I've missed half of the important questions I need to ask.
[addsig]
Here are some more questions:What is the current Net Operating Income?
Will the management agreement be assigned to the new purchaser? Or, will the new purchaser have to negotiate a new management agreement (higher rate)?
I assume you already know the asking price. If you pay full price, how much do you plan to finance and what will your debt service cost you?
Are the utilities separately metered? Who pays utilities -- tenant or landlord?
Is there an HOA? What are the dues? Do the bylaws have any provisions concerning rental use?
Is there any deferred maintenance?Rethink your "exit" strategy. Only one of your options allows you to actually exit. Do you want to be a landlord, or a seller?
If you want to be a landlord, why offer a two year lease at a reduced rent? For my last rent renewal, I offered my tenant $950 per month on a one year lease and $965 on a two year lease. She took the two year option because her housing costs would be fixed for two years.
Thanks for the input Dave. I have looked into the above things and received answers to all except the NOI. I have been told I should ask to see the Schedule E for the properties. Does the owner have to file a Schedule E for each property he owns or is it one Schedule E for all properties? How many years back should I request a copy of the Schedule E? Is this something my realtor should be requesting or directing me on?
I am also looking for a spreadsheet calculator w/ a little more flexibility than the pro-forma calculator available on this website. Any suggestions?
Quote: I have looked into the above things and received answers to all except the NOI. I have been told I should ask to see the Schedule E for the properties. Does the owner have to file a Schedule E for each property he owns or is it one Schedule E for all properties? A Schedule E is used to report rental activities. Up to three individual properties can be reported on a single Schedule E.
You can ask for a copy of the seller's Schedule E for the past two years, but the seller is not obligated to show you. If you are represented by a real estate agent, make getting this information from the seller the agent's challenge.
You should usually calculate your own NOI. If the property is tenant occupied, ask your agent for a copy of the seller's rent roll. This will list (for each property) the current rent and the lease expiration date. For vacant units, determine on your own what the probable rent would be.
Next, make your own assumptions about expenses. Call your insurance agent to get an idea of your landlord hazard insurance premium. Estimate your property taxes based upon your purchase price, rather than the seller's current property tax, just in case the property sale triggers a reassessment. If the landlord pays utilities, the utility company can give you a projected utility cost based upon the last 12 months usage. If the property is in reasonably good condition, then your estimate of a maintenance overhead might be as low as $25 per unit per month -- higher if indicated by age and condition of the property. Will you use professional management? If so, then call a management company and get a quote on monthly management fees, leasing fees, and typical vacancy periods for property in that neighborhood. Factor in a vacancy expense. Is there an HOA fee as well (If there is an HOA, is there a special assessment pending)?
Once you have your scheduled rents, subtract your costs of operation and ownership. Don't forget to include a contribution to a replacement reserve fund. What is left over, is your NOI.
If the NOI is at least 1.25 times your debt service, then I would say that the property probably has sufficient cash flow to handle the unplanned repairs. If the debt service is equal to or greater than your NOI, then the property is a negative cash flow proposition.
Thanks Dave,
I'm going down tomorrow to view each property. From every bit of information I've obtained it seemes to be all about the down payment. If I can get 10% down then it's a cash cow once rates get to market value. I appreciate all your hlep and will let you know how it all turns out.
Could you perhaps expose what the price is of this property. I make the estimate that it is asking somewhere $408,000. Would love to know. Besides you said you had $10,000 to invest in downpayment. Do you think that it could be obtained for that small a downpayment.? What kind of an area? Do you require gang signs to go to the 7/11? Could you live there?
What kind of mortgage money is available and what are the periods of payment and interest cost and origination cost etc. etc.
Try a backdoor, or have your broker do it for you and find out the real reason for selling. (Better deal somewhere) a Principal needs money? Whatever.
Of course you would manage yourself. You should gain the experience. Besides you sound young and the lack of sleep and the sound of the tenants voice will be a reminder of the reality of life. Go for it.
Lucius
Lucius,
To answer your questions in order:
765k is the asking price.
I will bring in partners to make a 10% downpayment to get an interest rate low enough to make the numbers work.
Although gang colors are not required to enter the neighborhood it is a lower income area. I viewed the properties yesterday and they have all new roofs and rear siding. The fronts have some repair issues, but nothing major from the outside appearance. Some cosmetic rotting wood around the door frames needs repairing and a good powerwashing would make the properties appear a lot better.
Mtg rates of course vary greatly depending on the cash down. In order to make it work, I'd need to get 10% down which is a deterrent since cash flow is not my strong point. I will definitely have at least two other partners in the deal. The down side is the fact that the rents may not be $100-150 below market rate as advertised, which makes it a deal breaker unless he is willing to drastically reduce the price.
The reason for selling according to the owner is to cash out on some of the properties while capital gains taxes are the lowest they've ever been.
Yes I would manage them myself. I figured I just survived 4 years of interupted sleep w/ my two kids, whats another nine babies.
Sorry, got to go. My son has put something in the VCR that doesn't go.
Although this deal may be dead as a rental property, I was considering contacting the tennants to see if they would like to own their current rental home. I would contact the renters and see if they would like to do a no money down purchase for retail rate and buy the homes from the current owner at a reduced rate. Is this a wraparound mortgage or a contract for deed or are those terms synonomous? Any advice on legality/morality and how to handle?