(By Mary Jane)

Anatomy of a Real Life Deal 

When is a deal a deal, how can you tell? 

There are a lot of deals where you can make a property more profitable by doing something to it.  For instance a property that has a lot of vacancies can be filled.  Adding a self-service pay laundry to an apartment complex, even vending machines if you have a large space available, instituting pet fees, etc. can all bring in more revenue.  On the other side lowering expenses will also make a property worth more.  We call these "value adds."

Other deals may already have sufficient cash flow that even though there are no value adds the property is still a good deal and will produce good cash flow.

We are currently working on a deal that looks like it will produce good cash flow from the start, although it does not have any significant value adds.  We thought it might be interesting to show you how we analyze the deal.  When we first looked at this deal we used the numbers the Broker gave us.  We made the offer and signed a contract.

After visiting the property and having a very nice meeting with the owner we found the numbers we had were not all correct.  So now we are deciding whether to renegotiate, wholesale this deal to someone else or walk away.

In order to find out if a deal is really a deal, you must have the following information: 

• Purchase price = $299,000

• How many units = 6 single family homes. (this equates to roughly $50,000 per unit which we verified on our visit to the area is a reasonable price for these homes)

• Unit configuration (i.e. number of bedrooms etc.) = 3-3/2s, 1-4/2, 1-4/2.5, 1- 5/3 (buying property with multiple bedrooms make them easier to rent)

• Other key information: Good class C, working class, neighborhoods.

• Current rental income = $49,598.00

• Other income = $0

• Tenants, who, how paying, lease expiration = All are government subsidized. Government checks arrive like clockwork. In this case, 5 of these six properties are rented to tenants who have been there more than 5 years. They are very happy there. 5 of the leases are now in the month to month category, one is a one year lease with six months left to go on the lease.  The month to month status combined with long term tenants is a positive, see potential value adds below.

• Yearly expenses

  • Yearly maintenance, repair and administrative $10,319

  • Property management will be 6% of gross rents $2,976

  • Yearly Insurance is currently $2,750

  • Yearly Taxes are $5,698

  • Total expenses: $21,743

• Potential "value adds": below government allowed rental rate for similar configured properties. We believe this could potentially create an additional $7,000 per year in income. This income is not used in our calculations because you buy properties as is, not as they can become.

• Is there any deferred maintenance and how much will it cost to fix it? Yes there is a little, we would ask the current owner to fix it or give us money back at closing to fix it ourselves.

• How much will the down payment be = usually 20 - 25%

• How much will the payments on the loan be = using a 5% rate of interest amortized over 30 years to get a payment of $1,284.00 per month or $15,408 a year.

Once you have this information, you can analyze the property and see if this deal will give your investors the return they need on their investment and make a suitable cash flow for both of you.  So here is what our analysis looks like:

Yearly income minus expenses equals Net Operating Income (NOI)

$49,598.00-$21,743.00=$27,855.00. 

 The cap rate of this property is 9.3 (NOI/purchase price).  We usually like to buy at a 10 cap or better.  At a 10 Cap, the price would be $278,550.00.  So am I still interested?

I need to go a step further and see what the cash flow would be.  What will Cash on Cash be and what is the debt coverage ratio.

I am going to do the numbers figuring we will put a 20% down payment on the property, provided by an investor for which she/he will get 50% of the deal.  The investor(s) will also cover the closing cost so their total investment would be around $78,000. 

The actual down payment would be $59,800.  Leaving $239,200.00 as the amount of the loan.  I am also using a 5% interest rate amortized over 30 years to get a payment of $1,284.00 per month or $15,408 a year.

Now I take my NOI of $27,856.00 subtract debt service of $15,408.00 to get a yearly cash-flow of $12,448.00.

That means that the investor and I will each get $6,224.00 a year cash flow from this property.

The Cash on Cash =15.96% (yearly cash flow/amount invested)  With the value add in place this would create a potential cash on cash rate of 24.9%.

Rate of return for the investor = 7.98% (investor yearly cash flow/amount invested)  With the "value add" of an increased $7,000 yearly rental income the investor would receive ½ of that or $3,500 for a projected yearly cash flow of $9,724 creating a potential 12.4% return on their investment.

Debt coverage is = 1.81 (this indicates how much cash flow you have to cover the mortgage = yearly NOI/yearly debt payments.  Most banks want to see at least a 1.3.  In other words, you are collecting 130% of the required mortgage payments.) 

As you can see all the numbers on this deal look great.  For us we will need to find an investor with $78k who is willing to earn 7.98% on their money or wholesale the deal to someone. 

Further good news here is because of the disconnect between what the broker advertised, which was the basis of our original offer, and what we discovered during our physical due diligence visit, we are in a position to renegotiate this package.  However, because the values of the individual properties seem reasonable it is unlikely that the current owner will accept a lot less. 

In any case, it looks like this deal is a winner.  If you are interested please contact us right away.      

Industry News  

(by Kevin) 

Where to invest your money now!

Our friends at Synergetic Investment Group LLC reported that they recently spoke with a representative of Wells Fargo Bank.  They were inquiring about Money Market and Certificate of Deposit rates. Even though they expected meager returns, they were still shocked when they were quoted between .01 and .03% for a CD and .01% for a MM.  Wow not even 1%. Think of the people that don't even realize this is happening to them.

We have confirmed these rates of return yet people think their money is safe sitting in a CD or savings account. If the inflation rate is 3% and your earnings are .01% you are losing 2.99% purchasing power each year.  This is all the more reason to consider investing in Real Estate with people you know and trust.

USA's 17 Most Dynamic Cities

National Real Estate Investor Online reviewed 5 studies conducted within the last three years and create a list of USA's 17 most dynamic cites. The list includes names you might expect to see like New York and San Francisco however there are cities that might be a surprise like Austin and San Jose. To read the article click here.

Apartments Still Going Strong

Nation Real Estate Investor reports that the apartment sector will remain strong through the foreseeable future.  Absorption of units has averaged nearly 39,000 units over the previous 12 quarters with vacancies expected to be around 4.2% for 2014.

Housing Markets Weaker Than Expected

Freddie Mac reports that many housing markets across the country remain "stalled" thanks to weak home purchase mortgage applications."  We believe that in addition to poor job growth the new, very restrictive and very punitive Dodd-Frank regulations have negatively impacted the housing market by making it much harder for many want to be homebuyers to qualify for mortgages

I've pointed out this potential challenge to some of our real estate professionals and I get a common response something like the mortgage brokers I use have always used stringent guidelines. While this may be true, the point is that fewer potential buyers will now qualify, therefore, some homes will stay on the market longer or need to sell at prices where the right buyer does qualify. 

Laughs and Interesting Stuff 

(Kevin and Mary Jane)  

(so people will wonder what your up to AND its contagious)