The Numbers, its that simple!

A sample balance sheet for a 3 unit complex

Purchase Price:                        300K
Down Payment:                       60K    20%

Income:
     Rents                                 800
1000
1100
coin op laundry                    150
Rental Income                       $3050  (Monthly)
Minus Vacancy/Reserve (10%)  -$350
GROSS RENTAL INCOME        $2700
yearly                            $32,400

Expenses
Water/Sewer                   $2000
Common Electric              $300
Heat                               $3000
Maintenance                    $1000
Property Taxes                $2500
Insurance                       $1000
Total Expenses:                       $9800

Net Operating Income:         $22,600

Debt Service:
7% 30 year loan:                     $19,160   ($1600 month)

Cash Flow Yearly                   $3,440

What does this all mean?  Well the building would make you approximately $250 plus a month after all expenses, factoring a healthy vacancy rate and assuming you are putting down 20% of the purchase price.  Is this a good investment?  The key ratio to look at is the Cash Flow divided by the down payment (your equity) which in this example yields a 5.7% figure, meaning that your money invested is earning a rate of return of 5.7%, better than what your bank will offer, but worth all the headaches of managing the building?   With that said, investing in the right markets for an extended period of time will more than likely give you some appreciation not to mention the  the beneficial tax depreciation one will realize while also looking for ways to boost income while reducing expenses can siginficantly sweeten the deal.  For example if one transferred the heat cost on to the tenant, cash flow would double as would your ROE to 12%.  Thanks for reading…

First off my apologies for such a delayed response in getting this next entry out.  No excuse but for out there on the front lines making the billions.  Also been working to get my associate brokers license, a 64 hour course twice a week for 8 hours a time that seems to have put a squeeze on trying to fit everything else in….

Where to look, how to determine appropriate pricing

Where are the markets?  Greater Portland and Lewiston/Auburn I would classify as the A regions, each with well over 150 buildings on the market.  B areas worth investigating would be Bath/Brunswick, greater Augusta and the greater Bangor regions with each areas having 50-75 units or so on the market.

The biggest issues with smaller multi’s are making the numbers work and figuring out what the actual numbers are as records kept by owners, if they exist at all, are generally not accurate.  Property taxes and utility expenses are continuing to spiral upwards at rates much faster than rental rates are rising as well. Heat is such a huge swing variable, it generally makes or breaks a deal based on whether the tenant or landlord foots the bill.

So…looking at buildings, first thing I do is figure out what the average cost per unit for a given area and size of a unit is, for example in Gardiner the average cost for a unit seems to fall around 30-40K where in Portland the cost is closer to 100-150K now rental rates in Gardiner range around 600 with heat included for a 2 bedroom whereas in Portland the rent can be as high as 1200 with the tenant paying for heat. Knowing the market, checking past solds, and consulting with experts is essential.

After getting a rough idea of cost/unit and having my list of buildings I am interested in I will begin making additions and subtractions to the buildings cost/unit based how much deferred maintenance there may be or how well the building has been cared for.

The 3 primary categories are structure, systems and cosmetics.
Structure – the roof, siding, foundation, basement condition, windows, insulation, etc.
Systems -  Heating, plumbing and electrical systems.
Cosmetics  – Bathrooms, Kitchens, floorings, wall coverings, common areas, landscaping, etc.

After making the rough adjustments I then have a much better sense of if the building is priced appropriately, I will also make a spreadsheet of the various items and their estimated useful life remaining and what it will cost to fix/upgrade when the time comes,  you will be surprised how quickly the costs on this list add up!

Next part – expenses and running the numbers.

Everywhere!  It seems I get inquiries all the time from investor oriented parties looking for the best deals out there. The best way to find a best deal is to find one yourself as if it is truly a spectacular deal it is already to late by the time you have asked the question to find it as it will have been snatched up.  The key is finding value in perhaps overlooked properties/areas, simply acuiring for well under what asking price is or putting a real estate deal together before it ever hits the public market.  What constitutes a great deal?  What makes one property more valuable over another?  A case specific question but cash flow, return on equity, appreciation potential seem to be common threads. 

1) Learn the inventory – Determine your geographic target area and go to work! Establish your network and start gathering information on the area, what are the trends, what new development is happening, demographics, rental and vacancy rates, specific tax and ordinance code’s, current values of homes, historical values, etc..

2) Scour the real estate listings, obviously look in the Maine MLSk but also check out auction houses, here is a list of them,  FSBO sites, sign up for a foreclosure web service such as Realty Trac or Foreclosure.com, the local newspapers and by simply driving around the neighborhoods.

3) Initial reseach and analysis- I recommend creating some sort of simple system that allows you to compare various key metrics quickly across your compiled list of properties, a simply spread sheet with boxes to check will work.   I generally look to half my list into properties right away into ones that might work and ones that would never work. 

5) Out of these half, go look at them, all of them, taking action is the only way to be successful in this business as it is in any business. I strongly recommend getting a buyers agent to work with you as it is possible to see property with out one, but adds an unnecessary amount of work you will need to do as well as elimanates the annoyance of having many agents soliciate for your business throughout your endeavors.

Next posting… analyzing a multi unit’s cost  

What is the best use of tax dollars?  The government initiative “Land for Maines Future”, created in 1987 has the mission to permanently protect and preserve lands that have exceptional natural or recreational value.  With bonds over the years of 35, 50 and 12 million overwhelmingly supported their is currently no more money left to seek new land to conserve.  To date, 440,000 acres have been protected through outright purchases as well as conservation easements, including over 113 miles of shorefront.  

For a state that has seen real estate prices soar in its southern areas, the program has been key in helping to ensure tht the last bastion of undeveloped land continues to be preserved, the Northern Woods.  Change is inevitable and with timber companies such as Plum Creek still holding the vast majority of undeveloped land it is essential that this program operates to ensure the balance of power is kept between development and conservation.

Yesterday the Maine Association of Realtors released a county by country historical analysis on average single family real estate sales prices. Below is the table for the entire state.  Click here to see Maine county by county statistics.

The overall annual increase in housing prices between 2000 and 2005 was 11%.  From 2005-2006 the price increase was 1%.

Overall State of Maine Prices

                        1998    1999    2000     2001    2002    2003    2004    2005    2006
Median Price     100K    105K    113K    124K    139K    156K    175K    191K    193K

Last June, Governor Baldacci vetoed legislature that would have put limits on the ability of residents in municipalities to retroactively block approved developments.  Promising to study the issue and present a better solution, here we are in February with seeminginly no progress having been made. The net result being a slowdown in Maine real estate development as interested parties and “big box” companies like Wal Mart must grapple with the uncertainty that they may be approved for a development by the local planning board yet town residents then have the ability to overturn the veto the approval.

 I personally don’t support Wall Mart’s popping up all over the Maine coastline, but it is necessary to have rules and laws that are just that, rules and laws that can’t be changed at the whim of a few residents.  If a town doesn’t want a certain type of development it should be written into their ordinances before a would be proposal is debated and approved and then later told it is no longer allowed to build.   

With great appreciation from a friend who forwarded me this list. 

General Resources

• US Green building council
• Maine chapter
• Find out how building green can boost your bottom line   
• Energy Star green building program
• http://www.igreenbuild.com/  

Building Green 

• https://www.buildinggreen.com/   
• Maine green home design competition  
• University of Maine, green components