Apartment Building Questions

[jc1409]

I'm looking at a 12 unit apartment building as an initial investment into the world of landlording. I'm looking for some feedback--pros or cons, to doing this, as well as some specific questions below. I owned a couple of duplexes during college (wow--about 20 years ago), but haven't been an RE investor since. Any horror stories or words of encouragement to jumping in like this?

Numbers seem okay to me, but please let me know if you have any thoughts: $300k ask, avg 350 rent, with data I have now, expenses look like about $23k (including mgmt fee, taxes, 10% maint., etc. -- not including vacancy or debt service).

I'm getting comfortable with price from a cashflow perspective, but from looking at current state assessed value, it shows only about $160k. The building isn't in greatest of areas, and I know appraisal will have to support value. I'm going to drive by tonight, and am told it's in good shape. Build in 1950's, and owner/landlord is (I'm told) very meticulous re upkeep, etc. Cash flows are there.

I'm continuing due diligence, but am getting a little bit of jitters as this is looking like the first one I may really be interested in. Just looking for some feedback, good or bad! The building is pretty far north of detroit area, about 1 hour away from my home, but I'm thinking that I may get a prop. manager and wouldn't expect frequent visits...
thanks

Jeff

[Dan Auito]

With a gross Operating income of $50,400.00 even not factoring vacancies knowing a meticulous owner has controlled it, it does give you a basis to investigate further.

Could you write into the contract that buyer is willing to pay $260,000 or appraised value whichever is less or something to that effect.

Is the owner willing to take back a second at a significantly lower interest rate etc... cash or terms I would work one or the other or both!

What is the economic outlook for the neighborhood in general, how many tenants have been in place, how long are the current leases in effect and what is the payment history of the existing tenant base?

I would say to have the building inspected carefully due to its age and negotiate lower on that as a start, look at deferred or the age life remaining on the major mechanicals, roof, windows, appliances etc...

It definitely looks like a worthwhile property to further investigate Jeff. Dan

[jc1409]

Thanks Dan. I did a drive by and didn't feel comfortable with the neighborhood at all. I drove by a couple of other apartments and have to do some number crunching, but will be back with more questions I'm sure! Thanks for the advice.

Any one else have thoughts generally on my post, and direction, fire away! Jeff

[Dan Auito]

That's a huge negative Jeff. Your prospective tenants will most likely feel the same way and if they don't I'm not sure you would want them!

[Aldo]

My reply has nothing to do with numbers. Workable numbers can be found in any size property.

My standard advice to new investors is to start with a duplex with a fourplex being a stretch. Yours is an unusual situation because you, long ago, owned rentals. 20 years ago the rules were different and less stringent, so you'd have to do a lot of catch-up. Also, 20 years ago, you were probably comfortable dealing with tenant issues or you'd have never bought that next duplex. In that 20 years your tolerance level may have unwittingly changed.

An hour away and a property manager? Please let me know if you choose to buy that property. I'll want to buy stock in the maker of Tylenol. As a landlord, I'd never own a property I can't get to in fifteen minutes. If something bad happens, I want to be there asap for personal and PR reasons. Also, being only an hour away, you'd likely do, at least, a drive-by a few times each month and you probably won't like what you see because no one on earth will manage the property as well as you would. That's assuming you're able to find a high quality property manager which is particularly difficult in low-income areas.

My suggestion would be to find a six-pack or smaller that is closer to home. If that works well for six months or a year, snag a larger property. Always test the waters before jumping in with both feet. This especially true if the property is in a low-end neighborhood.

[jc1409]

Thanks Aldo. I appreciate your advice.

I agree on changes to my tolerance and position compared to 20 years ago. This time, I'm actually looking at the number before jumping in head first!

Unofrtunately, anything I do is probably going to be 1/2 hour or more away, based on the Detroit area sprawl, and my location--but don't by any Tylenol stock yet.

As I go through this process I keep narrowing what I'm looking for, which is good--based on advice and thought about what I'd be comfortable with, I'm going to limit my searching to 8 units and down, with focus on 2 or 4 up front. I won't go into an area where I feel uncomfortable. I'm okay managing the property myself (with 5-10% management fee in my models).

My end goal is to have multiple income producing properties in my area.

[stallingsorg]

there no doubt that operating expense ratio (oer) analysis is the key to positive cash flow rental property management. it is more than the mathematical relationship between the operating expenses of a rental property or real estate investment and the total or gross operating income (goi) of that same property.

so let's assume that a rental property has a total gross income of $50,400 and we use a 10% vacancy and credit allowance. the total operating expenses of this property are $23,000.

the analysis is $23,000 divided by $50,400 minus $5040 of totals gross income or $45,360 is .5070 or 50.70%. i noticed most rental properties fairly predictable expense formulas starting with total expenses at 40% or so of goi. gross oer numbers are helpful but it also hide the truth about the property but really, i want to see where the each oer component part inefficiencies really are?

i do best running the numbers by hand using a pocket calculator but I rather be on the beach than figuring the ratio of goi. any real estate businessman who put up money and take out a loans without running these numbers or any numbers are being reckless and just plain lazy.

above rental property mentioned above and assume there are just three operating expenses. but really in real life there would be many more.

the total was $23,000.
property taxes is $6,000/$45,360 the (goi) 13.22%
*repairs is $14,000 is 30.86%
utilities is $3,000 is 6.61%

*older properties as you imagine have higher oer generally because they need more repairs and maintenance. compared that to newer properties.

you may want to get a handle on where the operating income is really going on a property. it quite bizarre and instantly point to either a problem property *(a high repair and maintenance ratio, for example). anyway, that my point of view.

[bamadiva]

In the case of this property and from my experience (about 1 year now), no matter how the numbers look on paper, bad tenants will make you sell quickly. The catch 22 is that you will not be able to get better tenants because of the area. Sometimes no matter how great the cash flow potential--location still plays the most important factor as to whether or not you will get this amount of cash flowing. As noted earlier, stick with areas where you yourself are comfortable.