To buy or not to buy...

R

Robber Baron_IHB

New member
Trooper suggested I ask your advice. I have the opportunity to buy my apartment building. Four units, three 2/1 one 3/2. The rent roll is 4018. Cost is 725000. Mortgage will be for 635000. Can raise the rent and get about 200 more. But those are the basic numbers. I am living in one so I get a owner occupied rate (5.8 today) and a pile of tax benefits. In my local market SFR prices have dropped about 12% in the last year and income property has dropped a few percent but has pretty much not sold. There are few comps out there one in a worse neighborhood for 650000 and one in a better neighborhood for 850000. I have a contract but we are not in escrow. I am usually quite capable but in this case I am stuck. Trooper referred me to you all. What do you think?
 
RR is $48k, but what are the expenses? vacancy rate? taxes and ins?





just off the cuff, I would think you should be looking for 10XRR
 
[quote author="Robber Baron" date=1223362996]Trooper suggested I ask your advice. I have the opportunity to buy my apartment building. Four units, three 2/1 one 3/2. The rent roll is 4018. Cost is 725000. Mortgage will be for 635000. Can raise the rent and get about 200 more. But those are the basic numbers. I am living in one so I get a owner occupied rate (5.8 today) and a pile of tax benefits. In my local market SFR prices have dropped about 12% in the last year and income property has dropped a few percent but has pretty much not sold. There are few comps out there one in a worse neighborhood for 650000 and one in a better neighborhood for 850000. I have a contract but we are not in escrow. I am usually quite capable but in this case I am stuck. Trooper referred me to you all. What do you think?</blockquote>


So three units, excluding yours, account for the $4018? For an investment property, forget about you living in one of the units. Use market rents for the building and whatever the financing and operating expense details happen to be... If the four units generate $4200 per month in rent, the figures don't pencil. If three units produce that $4200, it may be a different story.
 
IAC - probably wouldn't have asked but I am losing 10% a week in my deferred comp and am suddenly unsure about my financial decision making ability. I was talking to a friend today, Trooper, and she suggested posting the question here. I am completely sure I did not give you all the information needed to help, but this is the first time I have blogged anything. Please forgive the novice mistakes.



Starter Home - it is fully occupied, has been for years. Vacancies rent within the month. PITI and water and the gardener all together are 5100.
 
so you are planning on subsidizing it 25% (5100-4000)





just guessing you would occupy one unit (the 3/2) reducing your RR to $3k/month, so that leaves you a "rent" of $2k/month. and you figure because you can save money on taxes, the $ works.



but as an investment, it does not work, as i understand it, since you will *not* be able to sell it.



(i am not a professional, but there are a few here who may chime in)
 
[quote author="Robber Baron" date=1223362996]Trooper suggested I ask your advice. I have the opportunity to buy my apartment building. Four units, three 2/1 one 3/2. The rent roll is 4018. Cost is 725000. Mortgage will be for 635000. Can raise the rent and get about 200 more. But those are the basic numbers. I am living in one so I get a owner occupied rate (5.8 today) and a pile of tax benefits. In my local market SFR prices have dropped about 12% in the last year and income property has dropped a few percent but has pretty much not sold. There are few comps out there one in a worse neighborhood for 650000 and one in a better neighborhood for 850000. I have a contract but we are not in escrow. I am usually quite capable but in this case I am stuck. Trooper referred me to you all. What do you think?</blockquote>


What you are describing here is more speculation than investment. The cap rate is about 5.5% which isn't much better than high yield CDs, and those have little or no risk. If you were telling me you were buying this place for $450,000, I would tell you the numbers might work out. At $725,000, you will get wiped out. Don't do this. You are overpaying.
 
[quote author="Robber Baron" date=1223371206]IAC - probably wouldn't have asked but I am losing 10% a week in my deferred comp and am suddenly unsure about my financial decision making ability. I was talking to a friend today, Trooper, and she suggested posting the question here. I am completely sure I did not give you all the information needed to help, but this is the first time I have blogged anything. Please forgive the novice mistakes.



Starter Home - it is fully occupied, has been for years. Vacancies rent within the month. PITI and water and the gardener all together are 5100.</blockquote>


RB - First, don't mind asianinvasian. He has posted over a 160 times and only twice has he said anything remotely intelligent.



Second, our screen names are just above what you think are the screen names, what you are interpreting as names is a ranking system we have here.



Third, what is the gross rent of the place, whether you are renting it or not? I am confused, is it $4018 a month including your rent, or excluding your rent.



If it is excluding your rent, then it is a so so deal, but in no way would I want it as an investor. It's too much hassle to be a landlord with that amount of return on your investment, especially when prices continue to come down. My suggestion is to hold off.
 
Thanks to everyone who has responded so far. I don't have any expertise on multiple units, so wasn't much help when we were having this discussion today.....other than saying DON'T BUY, in the nicest way possible of course. ;)



Robber Baron, I too am confused about the $4018 amount, for simplicity sake let's just call it the $4200 that you are anticipating with rental increases.......pls clarify with a break down of what each apt rents for now and are you in the 3/2 or one of the 2/1's.



Side note: R.B. has advised me that the building will need to be re-wired in the future...but current wiring is sufficient. So build that cost into it.



Biscuitninja, what do you think ? You're the apartment bldg guru here.



Oh, and asianinvasian....I suggested to R.B. that he/she post here for some unbiased opinions.... so bug off.
 
To figure out if it's a good deal do the following...



Figure out the total potential rent of the complex (including your unit), take 10% off for vacancy, subtract out operating expenses, subtract 3-4% of the gross rents as your capital improvement budget, and take that number and divide it by the purchase price. If that percentage (the cap rate) is less than 1-2% higher than the interest rate that you'd pay on the debt then take a pass.
 
Depend on the area. Area with excessive apartment complexes built in the 50's such as the San Fernando Valley or NoHo have irresponsible renters that can increase your maintenance cost. Like a home you should select location with good schools and families who care about school is a good indicator of the their ethic.
 
[quote author="Trooper" date=1223387220]



Biscuitninja, what do you think ? You're the apartment bldg guru here.



</blockquote>


Guru? Hardly, i've just stumbled :lol: upon a system that works....



I don't know how much you are charging each unit so this is about a total number of 4 units with a total take home of 4800. With these numbers you will need to put down 36% to reach breakeven (or about 261k). Again, I don't know the comps in your area, so we would need what the comps (for rentals) really are.



The 90ishk you have is very, very small for a unit this size. If it were me I'd come up with these numbers...



~630k selling price with your 90k down.

~Monthy take home of about 4800

~6.5% interest rate (being conservative)

~Taxes of about 7.5k a month (~1.1%)

~1 month of no rent total (Rent reserve~4800)

~Revolving Maintence repairs (19k year ~1600mo)

~Insurance per unit of about 131.00 per month.



So you'd be about 5-7% short with what you put down with the new number.



But at the current price you'd be -16% negtative.... To be on the conservative side i'd say you'd be at 20-25% negtative If any little maintence issue happened you'd be negtative for the 1st year. If a major issue happened you'd be negtative for awhile.



The choice is obvious, they either come down OR you come up with some money....

good luck

-bix
 
First, thank you all so much. As soon as I posted the first response to your first replies I realized my screen name/ranking system mistake. Mea culpa. Trooper is right - it is 4200 with the rental increases. I do plan on staying in my unit which is a 2/1. I live alone, well with two cats, which could be a whole separate blog, but no need for the larger place.



The comps are right around where the sales price is. There have just been very few apartment sales this year. The most recent was in August about 5 blocks east for 715000. But, that is across a major street and this is a better neighborhood and the building is in better shape. While sfr prices have dropped, apartments have not. There is one short pay in the area for 839000 and that was a scam deal for 1.3 million in 2006. The question we have all been asking is why units have not been hit like sfrs. We are a port town and have employment slightly more stable than the rest of the area. Maybe. It is a real question and no one seems to have an answer. The place always rents and quickly. One tenant has been here 30+ years, another 10+ years, the third is the child of the 10+ woman and he has been in his own unit for 3+ years, and I have been here 6+ years. The rents are a little under market, 2/1 should be 1200 and 3/2 1600 to 1650. Right now the 2/1 is 945 (mine) 1040 and 545. The 3/2 is 1440. The landlord will raise the 3/2 to 1600 and the 535 to about 800 before we close escrow. But those are the rents for the year.



FreedomCM is correct on my newbie analysis. My rent would be about 2000 and I could do that with my eyes closed. And, I would get a tax break as well. That allows me to get the tax savings and not kill myself on a 3500-4000 a month house payment. I am here which has its good points and its horrible ones. I am aware of the tenant issues and the building problems. The bldg has been inspected and is in good shape. Foundation good, copper plumbing, Trooper is right about the wiring works, but when you add things like a/c and installed microwaves they really should be on their own circuit. I was not planning on selling. Buy and hold has stood me well, but this market is terrifying. Sorry, again a whole different blog.



Bix - here are the numbers I have:



Principal and interest is 3864.25 & taxes are 729.17 and insurance is 92 so piti = 4685.42 (Interest has been figured at 6%)

plus utilities (water and elec for common area) and gardner are $225 = 4910.42

plus pmi of .05/month of 193.00 = 5103.42

less rent = 1653.42 per month out of pocket - basically rent on my apt.



~630k selling price with your 90k down.

~Monthy take home of about 3450 (keeping my unit out)

~5.8% interest rate

~Taxes of about 7.5k a month (~1.1%) (are you sure this is not 1.25% per year? I have the taxes figured at about 730 a month.)

~1 month of no rent total (Rent reserve~4800) (have that)

~Revolving Maintence repairs (19k year ~1600mo) (OMG forgive me for not knowing where this comes from, but I don't)

~Insurance on the building and the contents of my unit on a condo rider of 92 per month from Farmers.



Believe me I wish I had more than 90K to put down on something. That is all that is in the cupboard. I refused to tap into my deferred comp for a down. Turns out that would have been better than having it evaporate. The rent reserve is a gift from my grandmother that I will not cash until the deal closes so as not to be tempted.



I hope that covers all bases. I'm still pondering...



Thank you all again so much.
 
Couple of questions.

- Is the building under rent control?

- What else comparable is for sale ?

- Have you had a realtor that you KNOW and TRUST run comps and check for like buildings for sale? AND to give you an objective opinion? I have a name for you if no one comes to mind, she is the wife of a former officer and I've used her before....and she's in your town.



Thoughts:

The August sale....we've gone down quite a bit since then. What type of negotiating did you do with the seller? What was his first price/offer to you?

- The insurance per month seems very low, is that including liability?

- Is 90K your whole nut? One new roof might put you over the edge.

- Have you priced out how much it would cost to re-wire? And negotiated that into the purchase price?

- Have you wondered why he hasn't put it on the MLS ? I mean, couldn't he conceivably find a buyer willing to pay more than you?

- So you will be paying $705 more a month than you do now, to be an owner of an aging asset, that is rapidly dropping in value. I don't know if the depreciation combined with the tax break will make up for that fact.

- You will always live in the apt, or else you will be in a negative cash flow position (might be a write off though)

- PMI ? just ugh.

- Major plus in already knowing the building and solid, pay on time tenants.



I just don't see the huge plus in buying this thing, but that's just me. If you wait, and keep renting for a few more years, you will more than be able to buy your dream home without the hassle and responsibility of being a landlord.....OR buy a similar building in 2 years for about 200K less.



My .02 cents. Can anyone else slice and dice these numbers for Robber Baron ?
 
<em>To figure out if it?s a good deal do the following?



Figure out the total potential rent of the complex (including your unit), take 10% off for vacancy, subtract out operating expenses, subtract 3-4% of the gross rents as your capital improvement budget, and take that number and divide it by the purchase price. If that percentage (the cap rate) is less than 1-2% higher than the interest rate that you?d pay on the debt then take a pass.

Profile</em>



<strong>Potential rent</strong> = $4200 (if R.B. doesn't live there and collects on all 4 units)

<strong>10% off for vacancy</strong>= $420 - but that might be high b/c there seem to be long term tenants there....but as you wish. $4200 - $420 = $3780.

<strong>Subtract operating costs</strong> = Bix said $1600, but R.B. says $225 (water, common electric and gardener)...R.B. will be the prop manager...what else is there Bix ? So $3780 - 225 = $3555.

<strong>Subtract 3-4% gross rents as ongoing cap improvement budget</strong> = 3% of $4200 = $126....... so $3555 - $126 = $3429.

<strong>Take that number and divide it by the purchase price</strong> = $3429 divided by $725,000 = 0.00472966 % Do you mean $725,000 divided by $3429 ? = 211.431904

Which one is the cap rate ?



Am I doing something wrong usc ? I think I followed your instruction...but am no math whiz.



Is there anything that makes it a better situation b/c R.B. is living in one of the units?
 
Yes, the building is under rent control. The rents on the two apartments can be raised because they have both moved people in who are not on the lease which allows a 10% per person increase. My parents are my agents. They are 50/50 on the deal. My dad would rather see me in the house (me too but then we are talking about 3500 to 4000 a month) not for the money but because he likes would never live in an apartment. He says its a good deal for the area, but not a great deal. My mom stares at the stock market each day and cries. She sits in a puddle of terror.



90k is it. Probably too many trips to Europe and Hawaii. I paid off all my student loans, have no debt except the car and that is just for FICO purposes. I make descent money, but tuck away 15.5K in the 457 plan and another ~750 a month in savings accounts. So, 2k while double what I am paying now would be easy for me and I can continue to save. Purchase price started at 750000. Rumor is there is one other offer at asking, my parents are throwing in their commission and the loan is free. I have 5K from grandma and more coming from other family members and I was just going to use that as the basis for the new nest egg. Can't sleep with no money in the bank.



Have not checked out the electrical yet. Will bet a bid for my unit and for all. The pmi makes me cry too. Other stuff for sale is all over the map. Cheapest is 629000 over on 25th Street, up to over a million. All for four units. Prices are high here, for houses too. I don't know if it the longshoremen and the large amounts of cash. Or the fact that people never leave San Pedro. But prices in the surrounding areas (and below Pacific) have fallen 25%+, here...maybe 12%. Very frustrating for a girl waiting to break into the market.
 
I wouldn't touch anything South of Gaffey, let alone Pacific. Too many pockets of R.S.P.'rs.



Nice that your folks are the agents, that'll save you some coin.....and the peace of mind of knowing you have all the correct comps.
 
[quote author="Trooper" date=1223462446]<strong>Potential rent</strong> = $4200 (if R.B. doesn't live there and collects on all 4 units)

<strong>10% off for vacancy</strong>= $420 - but that might be high b/c there seem to be long term tenants there....but as you wish. $4200 - $420 = $3780.

<strong>Subtract operating costs</strong> = Bix said $1600, but R.B. says $225 (water, common electric and gardener)...R.B. will be the prop manager...what else is there Bix ? So $3780 - 225 = $3555.

<strong>Subtract 3-4% gross rents as ongoing cap improvement budget</strong> = 3% of $4200 = $126....... so $3555 - $126 = $3429.

<strong>Take that number and divide it by the purchase price</strong> = $3429 divided by $725,000 = 0.00472966 % Do you mean $725,000 divided by $3429 ? = 211.431904

Which one is the cap rate ?



Am I doing something wrong usc ? I think I followed your instruction...but am no math whiz.



Is there anything that makes it a better situation b/c R.B. is living in one of the units?</blockquote>


Cap rate is an annual return, so multiply the monthly #s by 12 first. 12*.473% = 5.7%. The borrowing costs are likely to be higher than that. Keep in mind that this is a pretty rought cut analysis and that Bix' maintenance #s are an average, just like vehicle maintenance. You might spend $400 on car repairs on <em>average</em>, but you need a contingency plan in case the transmission goes out right after the warranty expires. Certainly it sounds like making the payment won't be a problem, but it doesn't sound like a great opportunity either.
 
[quote author="Trooper" date=1223465074]I wouldn't touch anything South of Gaffey, let alone Pacific. Too many pockets of R.S.P.'rs.



Nice that your folks are the agents, that'll save you some coin.....and the peace of mind of knowing you have all the correct comps.</blockquote>


RSP? Receiving Stolen Property?
 
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