Magic formula? Are you kidding?

This is me you’re talking to.

I get asked all the time about multi-family numbers analysis and profitability. If the person is a new investor, they probably want to plug some numbers into a formula, and poof, out comes an offer price that will 

1. Get the seller to accept it

2. Create positive cash flow for the buyer

There is no magic formula, you just have to understand the numbers

Understanding the numbers will help you explain to the seller where your offer came from, so lets start with income and expenses.

NOTE: Pay for what a property is doing now, not for what it might do after you put in all the work

Income: Rent, laundry income, garage rental income, etc. The real economic occupancy. That means the tenants who are paying rent, not thinking about paying.

Less Vacancy: Never run numbers without plugging in a vacancy rate. You can get a neighborhood or market vacancy rate from your local property owners association, speaking to other landlords etc. Rentals in general are soft right now, so a minimum would be 5%, probably 10% in lots of areas, and maybe 15% or more in tough neighborhoods. If you end up, through good management technique, in having a lower vacancy, then that’s your additional profit for all that homework you did. Don’t give that money to the seller.

Expenses: There are always more than you realize, and they are higher than you think, and higher than the seller says.

Taxes – check them yourself with the town, don’t take the realtor or sellers word

Insurance – your insurance will always be higher than what the seller is paying now, because you are not the seller with x years of history owning that property. Ask your current insurance agent for a loss run report on the property you are considering buying, and ask them for a quote if you were to buy the property today.

Utilities – it is important to find out who is paying for what when you take the sellers word for utilities. Sometimes you’ll find that tenant A is paying for tenant B’s electric bill because tenant B is paying for tenant A’s heat bill. I kid you not.

Trash removal – you will frequently find that the landlord goes to the dump or makes the tenants do this. Find out. If you want a trash removal service, call for prices.

Water/sewer – sometimes the landlord charges the tenants even in areas where that’s not legal. Find out the real story.

Grass/snow – usually the the landlord leaves these costs out, but you’ll have to pay for them. Get bids or include an estimate even if the landlord says the tenant does it. What tenant wants to shovel snow for the other 3 families in a four-family without your paying him.

Maintenance and repairs – if the landlord says the tenants pay for them, then you’ll have a lot of deferred maintenance, so make sure and estimate annual repairs even if the seller says there aren’t any.

Advertising/legal/accounting – calculate a number, even if it’s a few hundred a year, there are always some expenses

Management – even if you plan to manage it yourself, put in 5, 8 or 10% management fee. Check with some property managers. The bank will deduct management from the income when you go finance it, so you might as well be prepared.

Capital reserve – this is money set aside each month to replace capital items like roofs, boilers, siding, paving. Some people use $250 per unit per month, some use a percentage of income. I use 5% of gross income per year, that’s just my preference.

What’s left over after deducting expenses from income is called Net Operating Income (NOI). Next issue we’ll take NOI and plug it into a formula for estimating your offer and the value of the property.  

Your partner in profitable investing,

Ann Bellamy

Buy Now, LLC

 

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Quick Tip

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Coming soon – a source for huge discounts on granite counters, kitchen cabinets, flooring, porcelain tile, etc for rehabbers

I’m working with a couple of guys who are buying direct from the manufacturers, and who are coming up with a way for you to buy direct also. Stay tuned……