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Need a reality check on an apartment building investment

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 place.
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 demolished?
i
Reply to
Igor Chudov
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?
Reply to
bo peep

are these condos, rented out as apartments? What documents exist regarding the apartment/condo? What does the Title Report show?
Reply to
Pico Rico
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?
i
Reply to
Igor Chudov
On Thu, 21 Apr 2011 08:03:43 CST, Igor Chudov wrote:
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.
Reply to
HW \"Skip\" Weldon

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 repairs.
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 decision.
Good luck, Gene E. Utterback, EA, RFC, ABA
Reply to
Gene E. Utterback, EA, RFC, AB
All true, but don"t forget that immediate annuities do not produce capital gains down the road when they are sold
Reply to
Don
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 ("IR") 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 beneficiaries.
What makes you think your kids want to become landlords? Have you asked them?
Reply to
bo peep
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.
Reply to
Don
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.
Reply to
Don
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.
i
Reply to
Igor Chudov
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 statement.
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.
Thanks Gene.
i
Reply to
Igor Chudov
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.
Reply to
dapperdobbs
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.
Reply to
Don
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 understand why.
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...
-Tad
Reply to
Tad Borek
Don writes:
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 cash-flow-negative.
--
Plain Bread alone for e-mail, thanks.  The rest gets trashed.
Reply to
BreadWithSpam
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 later.
Reply to
Don
I would not, personally, hold the trump, as some sort of an example of a successful real estate entrepreneur. Otherwise I agree on fees.
i
Reply to
Igor Chudov

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.
Reply to
ps56k
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.
Reply to
Don

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