Questions To Ask On Buying A 4plex To Hold For Cashflow
I'm looking at a 4-plex for $120K with a GSI of $24,000. It would be my first purchase and am wondering what questions I should ask of the seller, as well as what questions I have a right to expect answers on?! Obvious questions to me are:
1. Are all the units rented?
2. How much time left on each lease?
3. Payment history of tenants?
4. Annual repair costs
5. ??? Any additional help would be greatly appreciated!!
Estimated numbers:
Asking price: $120,000
GOI: $20,150
NOE: $8000
P&I: $8622
CashFlow: $3,600 annual
Joe
You can ask anything you like. You might not get complete answers. Sometimes sellers do not keep the details. Other times they do not want to share.
As to the present tenants. I would want to see all the rental agreements. Verify the details with the tenants and check with them to see if there are any other agreements that they know about. Verify the deposits as these should be credited to you at closing.
Pad the numbers a bit as there might be things that you did not expect or repairs that have been waiting but no one spotted.
If you do not get full answers to some questions...
You might say you will not buy without all the details. The seller might say that they will just find another buyer. If you find you are in this situation figure out what the worst is and then decide how to reduce the risk (either with a cash buffer or by investing something else that is related and which you can verify).
Each deal comes with its own surprises. There is nothing absolutely certain in RE. You can make really good money without always having 'all the facts'. Anyone who things they have all the facts is likely unaware they are missing something. Do not go in blind but do not expect a perfect deal.
John
[addsig]
I am in the midst of doing a deal for six units and found that asking for the Schedule E for last years taxs to be very helpful. Though the owners agent didn't overstate income they did understate annual repair costs. I also asked for copies of all leases and the rent rolls for the units.
All of these combined should help establish a realistic NOI. In my humble opinion.
Bri
The item suggested to me which which I never have thought to ask for, is canceled check / receipt and bank stmts that show the actual income.
-How long has seller owned property?
- How long has it been for sale?
-How many offers have been made?
-What are annual taxes and insurance typically?
-Who is responsible for utilities?
-Who pays for waste disposal?
-Who handles maintenance on lawn?
These are some questions that may help you.
Quote:
On 2004-06-07 11:31, cjmazur wrote:
The item suggested to me which which I never have thought to ask for, is canceled check / receipt and bank stmts that show the actual income.
WEll I'm no expert but I wouldn't show a potential investor my bank statements and as far as the things Toddm152 said: the things I suggested answer all those questions except how long on market and owned. my 2cents
Bri
Brill, I think his point was that you want to see that the income that they claim is the same amount being deposited into their accounts.
On a small place you may want to ask for copies of signed leases to find out the same thing.
Other things that I find helpful (if the seller will tell me)
Vacancy rate
rent roll
Fixed costs (utilities, scheduled maintenance, lawncare, etc)
Why are they selling?
What will they do with the proceeds
How much equity do they have
will they carry some or all
Schedule E from their tax return for the past 3 years, as has been mentioned.
if your area has municipal property inspections, ask to see the last 2 or 3 inspection reports - they may have only done minimal work on a problem to get it to pass
Along with the inspections, ask about deferred maintenance, things that need to be done but haven't been done yet. Things like the roof is close to end of life but hasn't been replaced, or the furnace needs to be fixed but they waited since it is summer and they are selling.
As to the tax returns, it is normal practice to review the last 2 or 3 years taxes for the business you are buying. I know people fudge their numbers for their tax returns, but you are not auditing them, just getting verification. Not only do you see the income, but also the claimed expenses. If they won't share the info, you have to decide if you can get a clear picture from the other docs (leases, repair receipts, etc.)
Good luck
Peter
brill said:
wouldn't show a potential investor my bank statements
What do you have to hide? I'm not saying show all transactions just the rent deposts.
If you done' that's fine too, but the buyer should take it into considerations.
How long owned is public record and how long listed is in most mls systems.
In my experience, after looking at listings for multi-unit properties, owners almost always understate the expenses to make the property look more attractive and keep the cap rate high enough for the buyer to be interested. Use your common sense when looking at the operating expenses - knowing what costs are in your area helps(cost of fuel, garbage, advertising, etc).