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35 yr old building w/ 5 units on 3 acres in a nice area.

Asking Price is $319,000

Roof = 7 yrs old
Well pump = 2 yrs
Pressure Tank = Original
Oil Heater = 3 yrs

Taxes = $5,000/yr
Insurance = $1,900/yr
Maintenance = $5,245/yr (elec $700, trash $545, sewer $1800, lawn $1700, misc $500, does not include snow removal)

Total Expenses = $12,152/yr = $1,012/month


Rents = $41,340/yr = $3445/month

Mortgage = It's a 5 unit building requiring a commercial loan. what kind of lending guidelines can i expect? it's in a great area and in great condition. I dont have the cash to put 20% down on this. The seller is trying to do a 1031 & mover to a warmer locale so he wont carry a mortgage.

Present owner claims 26 days of vacancies in 13 yrs (he's a realtor).

I dont think that there is a chance of hell in being able to afford the property but does anyone have any recommendations?

Cash flow #'s:

Assuming 100% LTV: PITI @ 7.5% @ 25 yrs = $2,357/month = $28,288/yr

Before tax cash flow is basically zero.

After tax is another story due to the high annual depreciation & interest writeoff:

Depreciation: (319,000*.66)*(1/27)*(.27) = ~$2,100
Interest: 319,000*.075*.27 = ~$6450/yr (1st yr)

1) Does this deal look worth the trouble if it could be financed?
2) How do I finace it to make it worth the trouble?
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If the owner won't carry any paper, you won't be able to finance it without coming up with 20-30%. You could take a mortgage on your house, if you have enough equity.

That said, you did the analysis OK except you understated maintenance. As a rule of thumb you should figure $250/unit/year in maintenance materials expense. You specified "oil heater". Is there only one? In which case you pay for fuel?

You won't have cash flow out of this one. The vacancy factor is hard to swallow; 26 days of vacancy just isn't enough unless turnover is basically zero (even if you move fast, you'll spend probably two weeks remodeling one unit, which you will have to do occasionally even if the places are cared for). If turnover has been so low for so long, that is good but you need to look at the ages of the tenants and ask yourself how long they'll remain.

A decade ago, I purchased a building that had basically zero turnover in 30 years. I did it knowing that all the tenants were becoming elderly. Since that time, the building has turned over completely (retirement homes, deaths, etc) which has sent the vacancy factor through the roof (relatively speaking). OTOH, I have taken the rents up nearly double in that time, bringing them to market, so it is OK.

So, the question becomes; will your zero cash flow deal become negative if it starts to turn over? Will it start to turn over? You might also want to look at the neighborhood. Neighborhoods that have been stable for a long time might not remain so, especially if the neighbors are all aging.
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jim,

thank you for your comments, i always look forward to reading your analyses.

On the turnover front 1 tennant is the owner's MIL (i know). Another young couple has been there 4 yrs and is moving to buy their 1st home. Vacancies have been a non issue for him since he has been able to use his practice to find tenants quickly. I know that i would face a bigger challenge though....did i mention the property has a pond? <g>.

At current rents I know it wont cashflow, but was willing to look at it as a tax shelter & given its location & condition future appreciation; tough to get on a multiunit.

The property has been on the market for about 12 weeks now, the only (legal) way I know I would be able to finance it is to have the owner cover the downpayment gap for me. If this is still on the market come spring, i might try to broach the subject again.

Given that he is trying to swing a 1031 exchange is there any kind of carrot can i dangle to give him what he & I both want?


Thanks
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He wants cash for his 1031 so there's no way out. If you financed 100% with him or anyone, you'll be way over your head and never come out.
This is a case of needing money to make money.
You could sell your home and live in one of the units. 3 ac with a lake sounds great.
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Given that he is trying to swing a 1031 exchange is there any kind of carrot can i dangle to give him what he & I both want?

He wants cash. Kind of hard to get around that one.
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it was worth a shot.....beautiful property.
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