Does the price of the station really matter? The way I look at it, if it produces high revenue, I should be able to break even within a couple of years and then have cash flow from then on.
Anyways, more information...
Price : $170,000
Location: Main road, high traffic, one gas station within a mile away in both directions.
Yes, the price matters. If your estimated income is not enough to cover your cost of capital and the opportunity cost of your time, then it is a bad investment.
your cost of capital includes the interest paid on the loan (adjusted for the tax deduction) and the amount you could have made on your down payment had you invested in an investment of similar risk. The more you pay for the station, the higher your cost of capital is.
On top of buying yourself a job, I would like to add this... is the party you are purchasing from planning to open up another business nearby and are there any other new business that are soon to up and come?
Well the other thing that occurs to me is that since you are not buying the land you need to look carefully at the land lease. Does it have escalator clauses? How long does it have to run?
last question worries me. It sounds like you know little about gas stations. Not like I do, but if I were to buy a business I would know and love it. Just my thought...
Interesting Ruman. Do you think that excellent level of return is sustainable long term? How come tenants are so fearful of buying in that area that they are willing to pay a large premium to rent instead of buy?
My next question (probably final question) would be: Have you held a property like that in the mid-long term (5-10 years) and seen a steady return in the 15%+ cap rate range all of those years? It must be a bit more work to manage - my concern with using a management company is that they are aware it takes more work to manage and will charge accordingly.
Motel financing can be difficult unless the property is professionaly managed and all income is reported. The lenders out there are looking for Flag Motels (Name Brand) the typical deal is only for 75% LTV with a DSCR of 1.50. This means that there is alot of cash flow above the mortgage payment and all expenses. It has come to my attention recently that Motels that have the rooms accessable from outside are less desirable. They are looking more for the ones that you go inside and then up to your room from the lobby.
You would be required to have at least 3 full years of income and expense statements to determine if the cash flows are going to work, the underwriters want to see if there is more income each year going forward or less income.
Good Luck,
Robert
[addsig]
To your knowledge, is it true that most motel owners work with cash under the table and therefore cannot provide documentation? Hopefully what I am hearing from people is not correct.
It turns out that I might be able to get the full cost of the property out of a second mortgage. The seller says that he will show me all of his books once he is certain that I am a serious buyer....I am not sure how much more serious I can portray myself to him....but that is his deal. He says he will show me all of the books, but will not let me make copies of anything. Go figure! I think posing the seller-second idea is an interesting one to see how legit he is. I will keep you posted.
Depending on what you are paying this sounds like a low paying job at best, more information will yield you better answers.
Does the price of the station really matter? The way I look at it, if it produces high revenue, I should be able to break even within a couple of years and then have cash flow from then on.
Anyways, more information...
Price : $170,000
Location: Main road, high traffic, one gas station within a mile away in both directions.
Everything is up to date, even has propane tank.
Yes, the price matters. If your estimated income is not enough to cover your cost of capital and the opportunity cost of your time, then it is a bad investment.
your cost of capital includes the interest paid on the loan (adjusted for the tax deduction) and the amount you could have made on your down payment had you invested in an investment of similar risk. The more you pay for the station, the higher your cost of capital is.
On top of buying yourself a job, I would like to add this... is the party you are purchasing from planning to open up another business nearby and are there any other new business that are soon to up and come?
Well the other thing that occurs to me is that since you are not buying the land you need to look carefully at the land lease. Does it have escalator clauses? How long does it have to run?
last question worries me. It sounds like you know little about gas stations. Not like I do, but if I were to buy a business I would know and love it. Just my thought...
Interesting Ruman. Do you think that excellent level of return is sustainable long term? How come tenants are so fearful of buying in that area that they are willing to pay a large premium to rent instead of buy?
Thanks again.
My next question (probably final question) would be: Have you held a property like that in the mid-long term (5-10 years) and seen a steady return in the 15%+ cap rate range all of those years? It must be a bit more work to manage - my concern with using a management company is that they are aware it takes more work to manage and will charge accordingly.
Motel financing can be difficult unless the property is professionaly managed and all income is reported. The lenders out there are looking for Flag Motels (Name Brand) the typical deal is only for 75% LTV with a DSCR of 1.50. This means that there is alot of cash flow above the mortgage payment and all expenses. It has come to my attention recently that Motels that have the rooms accessable from outside are less desirable. They are looking more for the ones that you go inside and then up to your room from the lobby.
You would be required to have at least 3 full years of income and expense statements to determine if the cash flows are going to work, the underwriters want to see if there is more income each year going forward or less income.
Good Luck,
Robert
[addsig]
Thanks. By the way, what does DSCR stand for?
To your knowledge, is it true that most motel owners work with cash under the table and therefore cannot provide documentation? Hopefully what I am hearing from people is not correct.
Debt service coverage ratio
Divide mortgage payments by total income
It turns out that I might be able to get the full cost of the property out of a second mortgage. The seller says that he will show me all of his books once he is certain that I am a serious buyer....I am not sure how much more serious I can portray myself to him....but that is his deal. He says he will show me all of the books, but will not let me make copies of anything. Go figure! I think posing the seller-second idea is an interesting one to see how legit he is. I will keep you posted.
There are some commercial brokers, if the motel/hotel is under $1mil will finance 75% LTV, Stated Income/Stated Assets, as well.