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REAL ESTATE 28 unit deal analysis

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ryanpal

Contributor
Read Millionaire Fastlane
Jul 26, 2007
363
21
35
nj
Hello all,

This is a question for SteveO but I don't want to bog him down with questions ;]

Like many on this board I'm reading Voluccii's book about how to buy apt buildings. Although I'm not finished, I feel it's a good excercise to go through the motions to learn by doing. Another investor sent me this excel sheet. I'd like some feedback on any problems that can be seen based on this data...or any other input. I'm very new to this line of investing so I have alot of learning to do. I hope the cut and paste displays this correctly if not perhaps I can upload somewhere....here it goes, any feedback welcome.


cut and paste was horrific.

here's the excel file: http://www.freelispendens.com/28units.xls
 

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JesseO

Contributor
Jul 25, 2007
548
32
33
Phoenix, AZ
Fortunately I've got a deal with very similar numbers so it's kind of easy to compare to yours. First off, I would factor in 10% vacancy and hope for better. You should always try to play conservative with proformas. Also, the water/sewer costs looked a bit low to me; do you know what the actual -rate- is that the city charges? What are the rents for each unit type, and what is the mix of 1, 2, or 3 bedrooms?
 

yveskleinsky

Silver Contributor
Speedway Pass
Jul 26, 2007
2,233
505
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I am also new at evaluating numbers on a larger scale- so weigh my input accordingly!

Here a couple of points that look suspicious to me:

1. Why are you adding cable to gross income- or to income at all?
2. Utilities seems REALLY low for a 28 unit building.
3. Pest control also seems really low as an annual number.
4. What are you estimated your debt service to be?

...There is a spreadsheet floating around on this forum that is awesome and a lot more indepth. I can't remember who originally posted it, but if you PM me, I will email it to you- unless the original poster minds!

Good luck to you and keep us posted. :smxG: This is a learning experience for several of us!
 

bflbob

Bronze Contributor
Read Millionaire Fastlane
Speedway Pass
Jul 25, 2007
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Endicott, New York, United States
Why no increases in taxes, s&w, cable, etc?

Also, I agree on vacancy, although I use 8%, not 10%.

Finally, make sure what your taxes will be AFTER you buy.

If the current owner paid $750,000 for the place, and you're paying $1.5M, taxes may double.
 

JScott

Legendary Contributor
EPIC CONTRIBUTOR
Speedway Pass
Aug 24, 2007
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I'm not SteveO, but here are the questions/comments I'd have on this...

- First, and most importantly, what are these numbers based on? Are the income numbers verifiable? Are the expense numbers actual or pro-forma? Are there any other expenses that aren't shown here? Does this include property management costs? Is the 4.5% YOY income increases realistic? Are the 4% YOY expense increases realistic? Do you have demographic and economic indicators that tell you the 6% vacancy won't increase in subsequent years? Is the vacancy rate inclusive of total loss (unpaid rents, concessions, etc)? Is the unit mix appropriate for the area? That's the first set of questions...once you validate that the numbers are realistic and accurate, you can move on to the evaluation of the deal...

- When evaluating the deal, the first thing you need to ask yourself is whether it fits into your plan. Are you looking for a long-term investment? A short-term value play? Do you need cash flow? Or are you looking for capital gains? If you don't know what you're looking for (and why), you can't know if this particular property will meet you goals.

- The 9.15% cap rate seems decent, depending on the area. What are other, similar, properties in the area selling for in terms of cap-rate?

- It seems like there isn't much of a value play here (which may be fine if you're not looking for one). There's no upside on vacancy. While rents will increase 4.5% YOY, it doesn't appear that rents are below market (or they should be increasing more). And the expenses don't appear to be decreasing YOY, so there isn't any upside there. So, not a value play, but maybe a good cash-flowing property.

- From a cash-flow perspective, it seems decent. If you put down 20%, and get a 30-year fixed 7% rate, your debt service will be about $96K per year. That's about $40K in cash-flow, resulting in about 13-14% Cash ROI (based on your $300K down payment).

- Depending on your tax situation, the Total ROI is somewhere around 17-20%.

- If you were to hold the property for 5 years, and then sell it at the same cap rate you bought it at (9.15%), you'd see about $350K appreciation, plus the 5 years of income, would result in a total annualized return of about 22%.

So, those are the numbers. It's up to you to validate them (all the stuff in my first bullet above), and to decide if a property with this type of upside meets your plan/goals.

Hope that helps...
 

Sid23

Bronze Contributor
Speedway Pass
Aug 9, 2007
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- When evaluating the deal, the first thing you need to ask yourself is whether it fits into your plan. Are you looking for a long-term investment? A short-term value play? Do you need cash flow? Or are you looking for capital gains? If you don't know what you're looking for (and why), you can't know if this particular property will meet you goals.

THIS IS SO IMPORTANT! People, especially newbies (myself included), start looking at deals and often forget to ask themselves this very question!

FOCUS, FOCUS, FOCUS.

Rep speed ++ to JScott.
 

yveskleinsky

Silver Contributor
Speedway Pass
Jul 26, 2007
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I am confused over the spreadsheet. Are we looking at monthly or annual expenses? If the utilities are annual, I can't believe they would be that low. ...Even if they are monthly, I can't believe they'd be that low!
 

JesseO

Contributor
Jul 25, 2007
548
32
33
Phoenix, AZ
Keeping in mind that every area is different, my utilities break down as follows (rough numbers):

Basic extended cable for all tenants + internet in office: 400.00
Telephone-------------------------------------------: 40.00
Water/sewer/gas/trash-------------------------------: 1,000.00
Electric (common areas, office, pool)------------------: 1,000.00

These are rough monthly actual averages for 28 units or so. Don't forget landscaping (another 300 per month) and misc expenses. Vacancies in this area are at around 8%, but I would assume 10%. I think you need a better spreadsheet to work off of, and some better numbers to use. What do you think?
 

ryanpal

Contributor
Read Millionaire Fastlane
Jul 26, 2007
363
21
35
nj
thank you everyone for your replies.

this sheet was sent from another investor which i'm networking with. the funny thing is, my first thought was "is that a correct assumption for the vacancy rate?". i thought 10% was a rule of thumb as well but it seems you guys use around 8% or so. also, i'm not sure why the cable is listed as income as well. i found out this sheet is from a loan officer who probably sent it out to a few hundred people. my guess is he wanted the numbers to look nice.

i do appreciate your replies. this was a good first step into analyzing a possible deal. i've received a better spread sheet which i hope to get some data in for another deal analysis.

there were some great points made in here to help with understanding of apt complexes.

:)
 

JScott

Legendary Contributor
EPIC CONTRIBUTOR
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Aug 24, 2007
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In terms of vacancy, instead of just throwing out a number (whether it be 6%, 8%, 10%), why not use real numbers? It shouldn't be too difficult to find historic and current vacancy rates for a particular location, and once you get some experience (I'm hoping!) it should be a lot easier to anticipate actual vacancy rates than just throwing out a constant value.

By the way, there are plenty of places where average vacancy will be above 10%, so that's the risk in using that number...
 

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JScott

Legendary Contributor
EPIC CONTRIBUTOR
Speedway Pass
Aug 24, 2007
4,550
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Historical vacancy data can be on that building, surrounding comps, the surrounding local area, or even the surrounding metro area. Vacancy will be tied to local economic and demographic information (for example, vacancy is highly tied to employment rates and absolute number of jobs).

This information can be found in various places for historic numbers, but for future numbers, you need to research the variables that lead to vacancy/income, and figure out where your area is headed.

Volluci discusses this a bunch in the book...
 

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