I was looking for a real estate investment. A realtor that we used in
the past, located a deal with six apartments, sharing a stairway, in a
long apartment building.
The pro forma statement shows income of $39k per year after taxes and
water (renters are paying electric bills). All six apartments seem to
be occupied, with none seriously behind on rent.
The price on this is $300k.
It is located in a low crime area, a large apartment complex type of
I want to get some reality check on this.
For example, what does it mean exactly, to own six apartments in a
long building. What do I exactly own? What if the building needs to be
What did it appraise at? How much does the maintenance run on average?
$300k will bring in about $23k from an immediate fixed annuity with no
further effort on your part - is the extra $1333 of monthly income
worth the expenditure of your effort to manage and maintain the
building? Can you do basic repairs (plumbing, etc.) yourself? Would
you be required to use licensed contractors to do repairs?
I did not appraise it, it was sold for $550k 4 years ago. As for
annuities, annuity expires when I die, and these apartments, I could
pass on to my kids.
I do not personally want to do plumbing myself, though I can.
WHat I do not fully understand is, if I own a part of a long apartment
building, what exactly do I own?
On Thu, 21 Apr 2011 08:03:43 CST, Igor Chudov
As much as I like to think we can handle anything to do with personal
finance here , my suggestion to you would be to run this by a real
estate attorney in your state.
Maybe I'm missing something here, so I'll ask a few questions - you do NOT
have to answer them here just consider them in your analysis. Though I'd
like to see the answers as it will help the rest of assess what happens.
1 - what does 6 units in a long building mean? Will you own the entire
building or just these six units?
2 - either way, what are the legal issues for repairs? I have a client who
used to own two condos in a complex, he lived in one and rented the other.
When the roof of the building needed repairing the management company sent
out a "special assessment" to all the owners to recover the cost of the
3 - you need to prepare for the eventuality that there will be some needed
repairs and as the owner you'll be on the hook financially for them. How
the building, units and their appliances are will give you some idea of how
much you need to prepare for and how soon. A brand new building with brand
new units will likely not need anything significant for roughly 10 years. A
25 year old building that has never had any substantial work done is RIPE
for big repair/maintenance bills. How will you pay for these?
4 - are these in a rent controlled area? If so you need to factor that in.
If you can't raise rents on an old building how will recoup your overhead?
5 - with 6 units you need to know if you're going to be considered a real
estate professional for tax purposes and you need to familiarize yourself
with the passive activity loss rules. There are hourly participation
requirements and there is "active" and "material" participation. The rules
vary and you need to know where you fall.
6 - losses from rental real estate are limited and get phased out when your
income exceeds $100K and losses are completely suspended and carried forward
when your AGI exceeds $150K. So you may NOT get any immediate tax benefit
from these units. Does that matter to you? If you're counting on a tax
loss that you may not get you should know about it up front, it matters.
7 - will you be paying cash or obtaining a mortgage. The costs of the
mortgage, including settlement and interest on the loan, should be factored
into your analysis.
8 - is there a management company in place now that would look after the
property? Do you want to be the one who gets the 2AM phone call that there
is no heat? If there is a management company, or if you're going to use
one, what will they cost?
9 - I could NOT help but note your comment - "All six apartments seem to be
occupied, with none seriously behind on rent." This concerns me and I'd
think it should concern you as well. What does "seriously behind" mean?
Personally, I would NOT be happy with ANY tenant who was behind in the rent
to me, whether it was serious or not. Though I can appreciate that in this
economy we all make allowances for otherwise good clients (or tenants) with
whom we've had a long term relationship. In your case, you'd be the new
landlord - do you know, or have reason to believe, that the tenants would
treat you the same as they treat the current landlord?
10 - will you be buying all 6 units from the same owner? If so, why are
they selling out? I'd really like to know this, it may be an indicator of
what you're getting into.
Lastly, though there are other things you may want to consider, WHY do you
ask about the building being demolished? You must have some reason to think
that this possibility exists and I'd most certainly factor this into my
Gene E. Utterback, EA, RFC, ABA
Why would you want to buy real estate without an appraisal?
Not necessarily - with an IR annuity, your beneficiaries would always
get back all of the $300k as income, no matter how soon you expire.
Single Life Income with Installment Refund Paid to Beneficiaries
You receive this income for your lifetime, which means, you can never
outlive this income. If you should die before receiving an amount
equal to the premium, your beneficiaries will continue to receive this
income in installments until the total amount paid to you and your
beneficiaries equals the premium. Payments stop only upon your death
after the total premium has been paid back to you and your
What makes you think your kids want to become landlords? Have you
That is all good advice, and the OP would be well advised to take them
seriously and do further research into those matters. But I have the
impression a lot of the above points describe "worst case scenarios."
A lot more information would be needed from the OP besides what he
provided to know which of them may be relevant. Sometimes, after
reading about all the downsides of real estate investment, I wonder
how so many investors in rental property and owners of homes and
condos all across the land can exist at all. Undoubtedly a lot of them
are satisfied and happy with their investment decisions. Asian, Middle-
Eastern, and other foreign investors certainly believe US and Canadian
real estate is a good investment, because they are buying up apartment
complexes in many areas right and left.
My experience has been that real estate attorneys provide much helpful
information about details and procedures, title searches, taxes due at
the time of purchase, city ordinances and bylaws, what to watch out
for, and such, I have never encountered one who is willing to offer an
opinion as to whether or not a specific property is a "good deal" at
the offering price and should or should not be purchased. If there is
some major trouble like a faulty title, they will say so, but they are
not willing to suggest a specific counter-offer. Maybe they don't want
to infringe on appraisers and bank's territory, I don't know.
Very nice. I would expect, though, that payments on such an annuity
would be lower. Part of the reason for buying a piece of real estate
is to protect a part of my net worth from inflation, and I am leery of
using any purely financial instruments for this purpose.
The 5 year old probably does not want to become a landlord, but the 9
year old already does.
Gene, thanks for a long answer. My replies are below.
It is six units on one stairwell, so to speak. It is a section of a
much longer building.
I have to admit I have no clue. I would expect a similar treatment.
This is a 25 year old building.
Not a rent controlled area.
I have no clue here, but I would expect that I can report whatever
hours I may want to report, as the building is local to me.
My income exceeds the above amounts.
Cash, no mortgage.
I do not think that anyone is behind by more than a couple of
weeks. Though I should check. I was being conservative in making a
The owner of these 6 units invested $550k in them, had a loan secured
by property, ows $440k to the bank, is not making payments, and he is
foreclosed. This property will be sold to me by the bank.
I like to try to think about everything. This is a brick building, I
would say 25 years old.
In your replies to Gene's replies one reply is missing:
Are you going to be the active property manager, subject to a call at
2 a.m. when the heat doesn't work? Not that it's critical financially,
nor that it answers your question about what exactly you own, and
which liabilities you own, but it is something to consider - I spend a
lot of time on my house for things that, when I rented, I called the
maintenance guys for. A faucet here, a toilet there, a thermostat, a
clogged drain, ants, chlorine, walkway to be cleaned, doorbell to be
fixed, fridge makes funny noises, light missing in oven, A/C ducting
has holes, light switch doesn't work, 2nd floor window needs cleaning,
shrub dying, tree needs pruning, cat digs holes under back fence, bear
claws maple, branch fell, driveway cracked, the list seems endless -
and those are 'unusual items', not the routine stuff like watering,
fertilizing, landscaping, painting, carpeting, etc.. There may be a
'shared' property manager amongst other owners.
I believe the question you want answered is the connection other than
physical to the rest of the complex. E.g. If a section of roof needs
replacement, and it is not over any of the six units you are
contemplating, are you legally bound to share the bill for the
repairs? If the landscaping and apartment maintenance and tenant
quality differs from one section of the building to another, is there
an overriding HOA authority to enforce a minimum standard?
One other consideration, since you explained a bit more: who owns the
other sections of the building? Did they buy in at the same price
(e.g. 550K) range and are they likely to walk away too? I believe
there is a provision in some States that a new owner has some right to
evict existing tenants within a given period of time, which in some
instances can be a benefit to upgrading quality, bypassing an
otherwise lengthy process, but as part owner your neighbors are closer
to you and more of a factor.
I have been told that Donald Trump is considering getting out of real
estate, because he can't stand all those calls he has been getting at
2 am in the morning when things in his buildings don't work.
If I am not mistaken, some of the Saudi Princes are having second
thoughts about investment in North American real estate. They hate
getting on a plane and flying across the Atlantic every time a toilet
doesn't flush properly.
What a strange scenario. I'm having trouble imagining how the ownership
of the building is divided - you need to understand that completely, and
the effect of all of the other owners' activities on these six units.
For example, if they are individually divided condos it may be difficult
for potential buyers of other condos to get financing due to the
ownership mix; that could snowball into problems in those units if
owners are forced to sell. If there is an HOA and you are the last owner
standing what happens financially and legally? If it's a TIC...well that
just isn't likely to be the case but that is full of issues too.
Cash is not the typical way to buy rental properties; many of the
benefits of ownership come from at least some leverage. You should get
something like Nolo Press's Every Landlord's Tax Guide to help
And just a thought: the world is crawling with investment partnerships
that look for opportunities to buy rental properties via small LLCs and
that kind of thing. Why hasn't one of those bought this 6-unit place?
There could be a good answer, but if there isn't...
He pays people to manage the property.
For small scale landlords, that sort of thing is either done
by the owner or, like Trump by paying someone - though in this
case, it's typically paying a third-party manager rather than
one's own employees (as Trump does). Typical property
management fees are approximately 10% of monthly rent. That
can be a big chunk - in some cases big enough to make the
whole thing if not long-term unprofitable, at least short-term
Plain Bread alone for e-mail, thanks. The rest gets trashed.
True. My point is that, since Trump pays his managers and still makes
a profit, it is also possible for small landlords to pay a manager and
still make a profit. In any case, I would be more concerned about long-
term capital gains than on monthly cash flow. Even if the income from
the property is negative in the early years, you can think of the loss
as part of the start-up costs that will be recovered in later years,
or even like foregoing some personal spending to put an extra $100
into a savings account every month, money that will come back to you
yeah - right - that was kind of a dumb reply....
A normal person is going to balance the slim net profits
with the cost of :
- rental agent, to find a renter for a year
- management agent, to find repair people and handle renter callers.
- repair people to fix things.
Add all these up and then see what percentage of the net income
you are willing to advance to these agents....
vs driving over at a moments notice and doing it yourself... if you can or
are even able.
Property managers for small landlords typically combine all three of
the above jobs together for the 10% fee. Of course, in the case of
repairs, the landlord has to pay the cost of the repairs, although the
property manager takes care of finding someone to do it and checking
on the work. In some areas, you can hire a manager for 7% or 8% of the
total rent. Finding a good one usually is not a major headache, but it
is something to take seriously. Think of it as like the task of
finding a responsible baby-sitter to look after your child. Very
important, but not impossible nor outrageously expensive.