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Subject:  Re: 5 Unit Building Date:  1/28/2002  10:32 AM
Author:  jiml8 Number:  1072 of 14287

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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