Rental Property Investment Question for The Experts Here

asphaltgambler · 08-22-2006, 09:21 AM

If I was looking into small multi-unit (4 in this case) rental property........ how do you judge if it is a good deal for me based soley on asking price vs current rental income?

I know there are specific ratios of cost vs rental income. All things else being equal. As in: I do not know the condition of the property or how good the tenants are.

Thanks!

Amail · 04:11 PM

4-unit properties and smaller are priced according to comps. Larger properties are priced according to rents. Since you're interested in the price compared to the rents, let's look at that.

One way to evaluate this is by looking at the capitalization, or CAP rate. This is the net operating income divided by the purchase price. NOI is all income (rents, laundry, vending machines, etc.) minus all expenses (maintenance, vacancy, taxes, etc.), but NOT including your mortgage.

If you do not intend to personally manage the property you should also budget a healthy percentage for property management. 10% is typical for 4 units.

The higher the cap rate, the more it will cash flow. This also means the greater the risk, in general. Class C properties will have a higher cap rate than class A. The neighborhoods will be junkier. But, high cap rate is the way to go if you want cash flow.

*edit* High risk cash flowing properties will have a cap of 10% or higher. Low risk really nice properties in nice areas will have cap rates more in the 5% region.

Your financing will be the other major factor in your cash flow. If you put 100% down, you should cash flow pretty good regardless the price. If you put down 5% and finance the rest at 12% you will need to get a *real* good price if you expect it to cash flow.

For a first pass quick look, multiply the income by .5 (if you intend to manage yourself) and divide by .1. This should give you a reasonable starting point for a price that should cash flow considering 10% - 20% down and reasonable financing. If the price comes close to this first cut, then look at the actual income and expenses.

Base your offer on what the property is producing now, not what it could be producing. Don't let the seller get you to bite on a priced based on what the rents *should* be. If you end up buying the property then you can try to improve cash flow by raising rents and lowering costs.

GDSOB · GDSOB's Garage

Ask the owner for the schedule E for the last three years to justify the rents & expenses. They may tell you they didn't claim rents or had extra expenses to keep taxes down. BS.

Don't believe one bit of pro forma numbers unless you can prove them yourself.

Really not a good time to buy unless you know what you are doing. You will see many more deals in the coming months.

asphaltgambler · 08-22-2006, 12:38 PM

Thanks guys....................keep it coming

pwd72s · 08-22-2006, 12:47 PM

Quote:

Originally posted by GDSOB
Ask the owner for the schedule E for the last three years to justify the rents & expenses. They may tell you they didn't claim rents or had extra expenses to keep taxes down. BS.

Don't believe one bit of pro forma numbers unless you can prove them yourself.

Really not a good time to buy unless you know what you are doing. You will see many more deals in the coming months.

I agree. It's NOT a seller's market these days. Also, one of the happiest days of my life was when I quit being a landlord.

craigster59 · craigster59's Garage

Quote:

Originally posted by pwd72s
Also, one of the happiest days of my life was when I quit being a landlord.

True words. Look at these pics from a recent eviction that I'm still working on. Bathtub filled w/ dirty dishes, kitchen was unenterable, etc. 60+ total pickup truck loads to the dump.

cantdrv55 · 08-22-2006, 03:52 PM

That place looks like my old neighbor's yard. I thought they were just slobs so I called the county health and safety department and reported them. Their landlord cleaned up their yard for them but two months later went back to turning their place into a dump again. I sold my place and moved out of the neighborhood.

LakeCleElum · 08-22-2006, 08:05 PM

I had rentals of one sort or another for over 12 years. The only way to really make money is to buy the property low and sell high. This is hard to do as the market does not always follow the same path of the single family home.......I sold a tri-plex in 1986 and built a cabin overlooking a lake. The tri-plex had only appreciated 12,000 in 8 years. The cabin has appreciated $200,000 in about 18 years.....AND, it's enjoyment instead of a pain in the a$$.

asphaltgambler · 08-23-2006, 05:27 AM

Could anyone suggest a really good "dum@ss's guide" for rental property investing? OR is this question an oxymoron?

I already have/read several very good publications SFH investing. They were very helpful. Specifically looking to sucessful models where small time investors have tread before.

rammstein · 08:18 AM

I work with the nation's largest commercial real estate firm specializing in sales only ($21 billion last year). I'll stop with the sales pitch now

There are a million questions I can think to ask you right now. In a nutshell, realize that a dud of a property can be a deal to the right buyer. It all depends on what your goals are, and what you plan to put into it all.

My questions to you would be:
1) Do you already own apartment buildings?
2) What appeals to you about the property in question?
3) Why are you considering investing in real estate?
4) Would you plan on managing this property yourself? (it sounds like you would)
5) Are you looking for a turn-key property that is mostly occupied with no deferred maintenance, or are you more interested in a 'value-added' property where the property is distressed in some capacity but with some significant upsides to be realized through rehabbing or current rents below market etc etc etc
6) All-cash, financing, not sure?

If you would like to have a longer conversation about this, PM me sometime. Its nice to talk with investors who are serious sometimes (its been a frustrating day today, which is why I stopped in here). You could consider a multitude of other options too, such as small strip centers. You could even take a look at single-tenant triple-net leased properties nationwide. If you are unfamiliar, these are properties like an advanced auto parts or a Walgreens, where the tenant is responsible for ALL expenses and generally the leases are long and corporate guaranteed. Its very close to owning a bond, management is virtually nil (which is why you can shop nationally). This low-risk aspect of course means that the returns are less than riskier investments.

Come to think of it, sometime I should take a moment and post a thread about Commercial investing here. Maybe later. I need to stop procrastinating for now.

EDIT- also, ALWAYS underwrite the property yourself. The current taxes and insurance will change when you buy it (for the worst, naturally).

turbo6bar · 08-23-2006, 09:53 AM

Commercial is good, from what I've heard, but I'm not sure a beginner investor has the bank account to make it work. You can buy a SFR with 5% down. It's not easy to finance commercial with only 5% down.

The overwhelming theme is CAP rates are in the dump. CAP rates have dipped in the low single digits in some areas. It just isn't worth the hassle.

Since all areas are different, I think you need some local knowledge. Figure out the base CAP rates for your area. In some areas, a good normal CAP rate might be 9-10. In other parts of the country, it might be 12, and in CA, it may never get above 8. Do some research and find the average CAP rate for rental properties (in YOUR area) from say 1990-2000. What is it now? If it is much higher now, it may be better to wait for the market to get back to fundamentals.

turbo6bar · 08-23-2006, 10:06 AM

Quote:

Originally posted by rammstein
Come to think of it, sometime I should take a moment and post a thread about Commercial investing here. Maybe later. I need to stop procrastinating for now.

Please do. I am in single family rentals along with the rest of my family. The tenant pool is so tight right now, and getting quality tenants is a lot of work. Commercial RE is where I need to head. Commercial would be bread & butter, while fixer-upper single families would generate extra play money.

jurgen

Moneyguy1 · 08-23-2006, 10:12 AM

gambler:

Why the fixation on rental property, given the current and projected market conditions?

Amail · 08-23-2006, 10:39 AM

The projections for the rental market aren't bad - it's the projections for house prices that are bad.

From an appreciation standpoint, I think the smart play is to put your cash somewhere safe until the firesales really start in earnest. From a cashflow standpoint, I think you need to get fixed financing and set up the deal so that it cash flows. You don't have to be too concerned about the value of the property in the short term as long as you:
1) Are willing to hold the property for a few to several years
2) Get a property that is valued more according to rents than comps
3) Don't touch anything that does not cash flow - appreciation will NOT bail you out for quite some time.

Moneyguy1 · 08-23-2006, 10:44 AM

Amail

My thoughts exactly.

nota · 08-23-2006, 12:20 PM

location X3
and ZONING
here many up zoned lots are worth more then the buildings
as builders want to replace small units
with HI -RISE CONDOs
something few SFH lots will allow
but some multi family zoned units will
YMMV

snowman · 08-23-2006, 12:28 PM

Watch out for "wildcards". Example, rent controled apartments. Illegal conversions. Check out local plans for highways, redevelopment plans.

Amail · 08-23-2006, 01:01 PM

I should have thought of this earlier...

Find a real estate investment group near you. This is probably the single best piece of advice I could give. Some of the people there will be newbies, but some have BTDT. You will get lots of one-on-one exposure to people that have done exactly what you want to do. The people there will have a wide range of experience, from agents and brokers to mortgage brokers to truck drivers, school teachers, and engineers. Some are there looking to sell property, some are there to buy, and most are there to learn. Lots of diverse points of view. Many groups put together group buys. Some will have a "I have XXX to sell" session in case you are interested in finding properties that are not actively marketed. Many will have guest speakers come in to educate you in their area of expertise.

There are websites with links to various regional rei clubs - www.thecreativeinvestor.com is one that I use, but I suspect there are others as well.

I think you'll get the best bang for your buck by hooking up with a rei group.

asphaltgambler · 08-23-2006, 01:23 PM

Really more thinking out loud here as far as RE investing is concerned. I'm looking for an avenue towards RE investing to build financial wealth over the next 20 years.

Fairly 'green' to whole commercial aspect, and honestly (for now) have very little cash to invest. I thought that buying income producing property would be a way to pyramid my way up. Leveraging as I go.

Bill Douglas · 08-23-2006, 01:32 PM

Yup commercial.

I'm landlord of nine places. The capital gains have been excellent, but trust me it's no free lunch. Argh, in fact as I write tenants who moved in and paid nothing since the first rent, made treats of violence and a death threat against me, are moving their stuff out. I took it through the courts but everything is in their favor (Government looking after the underprividgeedd classes - joke). So don't worry to much about returns on investment etc, concentrate on how good is the neighbourhod, what quality of persons are you going to attract - and NEVER rent to the riff raff classes.