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Quick - real estate question

Discussion in 'Off Topic Threads' started by Bisi, Jun 13, 2011.

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  1. Bisi

    Bisi TS Member

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    Just found out today that there is an absolute real estate auction happening tomorrow in my area. 4 duplexs are going to be auctioned. Units 30 years old, nice neighborhood. A friend called me and he wants me to go bottom fishing with him. Maybe we can snag 1 or 2. We got into one of the units tonight and there are in surprising decent condition.

    Numbers: Each unit is renting for average of $820 a month. 2 units in each building. $820x2 = $1640 each month. 1640x12 = $19680 a year if rented all year.

    I figure 75% occup rate would be $14760 a year

    Property taxes -3200 a year

    Insurance -1200 a year

    Garbage pickup @$30 a week -1560 a year

    Grass mowing and snow removal -1300 a year

    Cash flow if nothing goes wrong $7500 a year or $625 a month

    These units are 30 years old, stable, but I see no appreciation on units like this. This is Indiana, not the East or West coast.

    Just from a cash flow way of looking at these what can I bid on em??

    Wish I had more time but the auction is tomorrow at high noon.
     
  2. mrskeet410

    mrskeet410 TS Member

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    If there is a mortgage on the property, stay home. The mortgage owner will buy the property to protect their investment in the property. If it's mortgage free or has a minimal mortgage, and being sold for taxes or because the owner, often an executor, just wants to get rid of it as/is and quick, then you might get a deal.

    You'll probably need cash. A sufficient line of credit may work. You need to checking on that NOW, especially what documentation of your line of credit or source of cash the seller requires. Bidding without ready cash, then going to get a mortgage won't work. If you have the cash at the sale, you can apply and pray for a mortgage after you own the property.

    Cash flow bid = cash flow divided by your cost of capital.
     
  3. Setterman

    Setterman Well-Known Member

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    It won't cost you anything to go to the auction except time. Many of the banks are trying to clean up their ledgers and get rid of real estate. Nor do they want to mess with multiple tenants and maintenance. You may be surprised how cheap they sell. Few people want the headaches, so buyers may be limited.

    Few people can afford to buy and many have lost their homes so they are forced to rent. Unfortunately it's going to be that way for quite some time, so rent rates are higher than normal, especially for good places in decent locations.

    Bid for a 3 year payback.
     
  4. Dickgshot

    Dickgshot Well-Known Member

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    The is not an investment, it is a business and don't underestimate the
    time, expense and aggravation. Trying to find tenants with good credit, collecting delinquent rent, try to evict tenants, having the property trashed, appliance breaking down, emergency repairs, etc. You may want to hire a
    management company, but that will cost, and you may not find one that wants to do it.

    Good luck.
     
  5. Jeff P

    Jeff P Well-Known Member

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    if you think you're going to net $625/mo...you take the interest rate the bank wants for a loan and figure out how big a mortgage $625 will pay.

    At 4.5%, my back of the envelope calc shows it will be around $123k. That's what the buildings are theoretically worth based on cash flow.

    that's not much....

    I can think of a LOT better ways to generate income from $123k without having to deal with renters and their problems. But that's my two cents worth.
     
  6. mrskeet410

    mrskeet410 TS Member

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    Buy low. Sell high. Good time to buy low. I could make a nice tax shelter if you are in the position to benefit from that.

    Leverage is the way to make big bucks, or end up ruined if you can't make the payments.
     
  7. dmarbell

    dmarbell Active Member

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    Bisi,

    Unless I missed it, you left out maintenance. The buildings are 30 years old, and will require some ongoing maintenance. Deduct maintenance, and then as pullll said, cap it at 12% or so to get your price. For example, if maintenance is $1,000 per year, your cash flow is $6,500 and you would pay around $55,000 to get the 12% cap rate.

    Remember, we are trapshooters and not real estate professionals (not most of us). Take advice here with a smallish grain of salt.

    Also remember, you are bottom fishing.

    Danny
     
  8. mrskeet410

    mrskeet410 TS Member

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    A general rule for maintenance is one to two months income, depending if you are doing the work or hiring professionals. Figure on repainting every change of tenants and maybe replacing carpets.

    And you have to ask yourself if you are looking for long-term capital appreciation or current income. Rents are up and interest rates are down so you may be able have a positive cash flow early if you leverage.
     
  9. Bisi

    Bisi TS Member

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    Well I didn't get one. There was only 11 people at the auction. They used the "freedom tract method" of auctioning. They auctioned off each of the 4 units. High bid for 1st unit was 110K, 2nd also went for 110K, 3rd 90K, and 4th 85K. Then they combined all properties and auctioned as one unit. Some guy bid 440K for the 4 units combined.

    That is when I left. I don't know if the first individual bidders raised their bids to break the combination or not.

    I was bottom fishing and went as high as 70K, but didn't get anything. Didn't have much time to do any homework so......maybe some other time.

    Looking back if the one guy got all for 440K, he probably didn't get too bad of a deal. All 8 apartments were rented with average rent of $830 a month.

    If you can put up with the headaches it would beat getting 1% on your money sitting in a bank cd.

    thanks for your input.
     
  10. DB Bill

    DB Bill Active Member

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    The biggest worry about rental units is what your State allows you to do to get rid of deadbeats who won't pay their rent or trash the place.

    California basically gives tenants a license to steal -- all you need to do to stop an eviction is make a "good faith" payment which can be a very, very portion of what they owe. Then they're home free until you get another eviction notice and another "good faith" payment and so on and so on.

    You need laws like Arizona -- you don't pay and the paper work to evict is simple, quick and permanent.
     
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