Questions I should ask
I am looking at my first buy and hold and I am looking at a duplex, I am unsure of the "right" questions to ask, to get a good evaluation of the property.
Can some one please give me some pointers. 
To whom do you wish to gain the evaluation from, the seller, listing agent, buyer's agent, tenant or inspector. To be honest the only evaluation that should count for you is the one that you do yourself. All others can have underlying reasons for not giving you an honest evaluation. You must gain the skills needed to go through and look for faults in the building that will allow you make the determination to go forward with the purchase without have to lay out any money. Consider the age of the building, plumbing, wood rott, roofing, appliances, carpet, cabinets, electrical, heating and air conditioning, windows, foundation, rents for the area and more. You must have some idea of these before you even lay out one penny. I hope this will get you thinking. Good Luck.[ Edited by Vern on Date 12/17/2002 ]
Vern,
Thanks for your speedy post. I guess I was unlclear in the reason for my post. My main concern is that I am getting the correct rent information. So when I go to me financial backer, I can explain why I'm asking for $112k loan, and that I can afford it, just by having half the property filled.
rookinvestor,
Since your question is really about financing your deal, rather than a landlord/tenant issue, I suspect that your question belongs on the Financing Forum. You may also need to be a little more specific about the "financial backer". Are you talking about a hard money lender, a conventional loan from an institutional lender, or a portfolio lender?
For the type of lender you propose to use, you might also ask the forum what this lender typically looks at when determining the value of the property that secures the loan.
Dave T
[ Edited by DaveT on Date 12/17/2002 ]
Dave T,
Thanks for your post, appreciate it very much. But in reality I am not concerned about fianacing. I use privite funding, so that isn't a problem.
I guess I want to know that the property is already generating enough income to cover my finacial obligations. As well as give me a posotive cash flow. And what type of tenets are currently living in the complex. Are these things that are public knowlege or do I need to inquire with my REA? I don't want to approach my REA with my six guns blazing...."fireing blanks" so to speak.[ Edited by rookinvestor on Date 12/18/2002 ]
Hello Rookinvestor, as a general rule I don't purchase a duplex unless I can clear around 100 per unit after taxes and insurance are paid. You will have about a 20 to 25% vacancy rate, you will want to count this in on your cashflow return. Additionally you will have repairs, cleaning and painting cost that will need to be counted into the figure.
As for as asking your agent any questions, don't be afraid to do that. You can ask any type of question that you don't have the answer. Your agent should answer or find the answer if they don't know it. After all they are working for you. Good Luck
Duplexes can be excellent buys. They sell for less than comparable single family dwellings. In addition, the people who line in these units see them as their own property and take good care of them. They are small, have their own backyards and have the feel of a single-family residence.
When I deal with rental property as an investment I use the following formula, as do many investors:
1. Calculate gross rents, both yearly and monthly
2. Add up & total all variable expenses, both yearly & monthly
3. Add up & total yearly mortgage payments
4. Deduct variable expenses & mortgage payments from the gross rents
5. Take the net figure & divide it by your down payment and this will give you a percentage that will provide a rate of return on your invested dollars
I also suggest going to http://www.thecreativeinvestor.com/modules.php?name=Downloads&d_op=viewdownload&cid=8 and checking out the formula download
I find duplexes not as management intense as larger multi family units.
I will normally ask for a P/L over the last couple of years of the subject property as well I check the rental market in the area to determine if it is a renters or landlord market.
Hope this helps
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Vern and R4M,
Thanks for your advice, I appreciate it. Sorry it took so long for me to explain what I was looking for. In my inital post
Quote:
I guess I want to know that the property is already generating enough income to cover my finacial obligations. As well as give me a posotive cash flow. And what type of tenets are currently living in the complex. Are these things that are public knowlege or do I need to inquire with my REA? I don't want to approach my REA with my six guns blazing...."fireing blanks" so to speak.
rookinvestor.
Add a clause to your purchase offer that your offer is contingent upon your receipt and approval of the current "rent roll". The rent roll should give you (for each unit), the current rent, the amount of the security deposit, and the lease expiration date.'
As to the current expenses, you could always ask the current owner to give you an expense report for the past couple of years, but use this cautiously. For each expense item, you should get your own estimates of cost.
Since you will be purchasing this property subject to the current leases, you will also want some provisions in your contract that give you some protection against any disputes the current owner may have with his tenants. You will also want to know which appliances belong to the tenants and which will convey with the property -- and you will also want the tenants to agree to this inventory.
I suggest, at a minimum, the following additional clauses should be included in your purchase offer. Your lawyer may suggest others for your protection:
1. Buyer reserves the right to inspect leases, contact the property manager and tenants. Seller shall provide buyer with an accounting and assignment of security deposits at closing. Seller agrees to defend and indemnify buyer for any and all claims, judgements and lawsuits related to the wrongful withholding of security deposits that arose out of events or circumstances arising before closing of title. This paragraph shall survive closing of title.
2. Buyer shall be entitled keys and be entitled to access to show partners, lenders, inspectors and/or contractors prior to closing. Buyer may place an appropriate sign on the property prior to closing for prospective tenants.
3. Seller warrants that all appliances, roof, plumbing, heating and ventilation systems are in good and working order at time of closing. This clause shall survive closing of title.
Hope this helps.
Dave T,
Thanks for the clause details, after sitting with my counselor, he mentioned the same things, as protection against furture legal action any tenet might be considering.
Again Thanks
Chad
Someone correct me if I'm wrong but couldn't you find out what the property is generating by asking to see the sellers 1040 Schedule E return?
Wealthseeker:
YEAH! But...if you were to ask to see mine I'd tell ya to go POUND SALT or SAND whichhever ya like!
lol
Derrick
Since the 1040 Schedule E deals with income and expenses related to rental properties, why would a seller be hesitant to show it to a potential buyer? If anything, it would prove that the property is capable of generating $x per month. Thanks
Some people are just like that. Always ask, but don't expect to get it.
Remember that each Schedule E form shows all the income and expenses for up to three properties. If you are only buying one property, I might not want you to see my numbers for unrelated properties.
You can always ask for the past two year's Schedule Es for the property, but also expect that the seller will resist giving you a copy of a portion of his tax return. A lot of people will consider this an invasion of privacy, and will just refuse to do it -- reasonable arguments to the contrary notwithstanding.
Most expense items are easily verifiable anyway. Local utilities companies will usually tell you what the average annual utility cost is for a property. You should know what market rents are, and the rent roll will tell you what the current tenants are paying. The seller's mortgage interest and depreciation expenses aren't relevant because you will have your own depreciation schedule and your own amortization schedule if you are financing the purchase. Property tax information is obtained either from a friendly realtor, or at your local courthouse tax office. A call to your insurance agent will result in a fair estimate of your hazard insurance cost. If the property is in a homeowner's association or condo association, the association manager can tell you what the dues are and whether any special assessments apply.
Your own walk through should give you some idea of what repairs you will have to do immediately and what repairs you will have to do in the near future. You should develop your own estimates of repair costs for any work you can not do yourself. During your walkthrough, also pay attention to the age of major appliances and the HVAC. You will need to determine when these systems may need to be replaced and estimate replacement costs so you can establish a replacement reserve fund.
Now if you can do all this "due diligence" why do you need the seller's Schedule E? I maintain that the only numbers that you can rely on for your investment analysis are the numbers you develop yourself from independent sources.[ Edited by DaveT on Date 12/20/2002 ]
WealthSeeker,
I agree with DerrickAli on the release of a 1040 Schedule E, I keep a PL statement on each unit. You may want to ask your investor if they have one on the subject property.
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