Please Advise Me On This Opportunity

Comments(8)

• 
  InActive_Account8th July, 2004

  To me that looks like a good deal. You would certainly want to verify the vacancy rate. Weekly rentals typically have a higher vacancy than 5%. If all those numbers are correct the cash flow looks good. Even if fully leveraged.

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  MikeWood8th July, 2004

  Hey Alan, just want to congratulate you on thinking big. I would love to find something similar to what you found that would produce a significant income so that I could stop working for someone else. The one thing I would want to know is how much your mortgage payments ( is it still called a mortgage on a 13 unit ???) would be and how that would affect the amount of money you would take in per year. The other thing to consider is that they are asking 610k for something that will return 54.4k which is less than a 9 percent return on investment. Maybe someone else on this site can shed some more light on whether or not this is a good deal and give some ideas on how to structure it to best benefit you. Wish you the best!!!!

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  commercialking9th July, 2004

  Yes, Alan this is an acceptable deal, not a home run but a good solid single, maybe even a double. You're buying here on a .09 cap. In the current interest rate enviornment that is ok-- you'll see some minor cash flow. A .10 cap would be much better and an .11 would be better than that, obviously.
  
  Other good things, Your expense numbers include a management fee and the management fee seems reasonable at 10% of collections. The Vacancy/deliquency number might be a little light but given that you also included a reserve account you should be ok.
  
  I'd try to talk them down to $544,000 ( a 10 cap.) or get them to take back some paper on good terms.

• 
  hibby7612th July, 2004

  Alan,
  
  Good to meet you.
  
  As cresystems_com said, 5% vacancy for weekly rentals does seem low
  
  MikeWood....you're doing your ROI calculation incorrectly. That's correct...IF he were to pay cash for it, but he probably isn't. You're actually calculating cap rate (NOI/Price = about 9%) and not ROI. ROI would be Down Payment/yearly cashflow = ROI.
  
  As usual, I agree with CommercialKing.
  
  Here are my thoughts....
  
  1. HOW ARE YOU GOING TO BUY IT??? That, for me, is the most important question. Conventionally with 25% down? Do you need some creative financing??? If you need to buy it creativly you need half decent numbers but great terms. If you're buying it conventionally you should demand great numbers as cash is king. If you can walk into this deal without using any of your own money and it will cashflow like that with you 1000 miles away, then I'd say it's a good deal. If you're coming to the table with cash I'd say hold out....you'll find something MUCH better. If you're using partners that have cash who are sophisticated investors then this property will probably be a tough sale, unless you're planning on flipping it (see #3).
  
  2. Ask for the Schedule E from the last 1-3 years of the sellers tax returns. That will paint a different story about the finances (as there he would have tried to minimize income and maximize expenses). You can use this to get the price down. Remember you're buying an INCOME STREAM more than a piece of property (...at least that's your arguement).
  
  3. What are cap rates in your area??? If caps in your area are at 5 and 6% and you can pick this up at 9% then it might be a good property to get an option on and flip the contract. Just a thought. If you could sell it at a 6% cap it would sell for $1,152,996. A good (local) commercial realtor or appraiser should know that off the top of his head.
  
  4. How is it being managed now??? If it's currently being managed by a management company then your expenses might be right on. However higher expenses are generally incurred with maintenance company as they are not as price sensitive.
  
  5. How much defered maintenance??? (if any)
  
  6. How long has the current owner owned it??? Good chance your insurance rates will increase...could double or triple. The insurance industry has changed since september 11th. Use this to argue price down.
  
  7. How can or will you increase value??? Increased rates? Daily rather than weekly? vending, laundry, storage, etc. Is there anywhere here to drastically increase value?
  
  I don't know your market, but your numbers seem to be acurate, and perhaps even agressive on the expenses (which is good).
  
  FYI....you said "Total Income $115,300"...The technical term is Gross Operating Income or GOI.
  
  In a nutshell....Good deal if you can get it wiht little or no money out of pocket...otherwise it's not too exciting.

• 
  KyleGatton12th July, 2004

  Commercial King and Hibby have covered all the bases. The only different opinion I have is that I would start the buy price at 510K, and I would also find out how much of a mortgage they currently have on it. See if that is assumable, if the rate is low enough.
  
  Also after you buy it, you may want to defer some of those payments to the tenants, such as Cable and Water.
  
  In this market it is definitely a good find.
  
  
  Good Luck,
  Kyle

• 
  MikeWood28th July, 2004

  Thanks for the correction hibby, I did not know that was called cap rate!!!

• 
  InActive_Account30th July, 2004

  Dosent sound great unless you are paying cash. A loan of 100% of price would make your yearly debt service (payments for a year) more than your NOI. Thats a no no.

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  homee30th July, 2004

  It sounds like a motel, where they only rent weekly and the bills are paid by the owner. If it an apartment building then why is the owner paying all the bills. If it is a small motel my advice stay away from it. Why am I saying that been there done that.