I hope I don't insult anyone with this email but...wait. Who the hell am I kidding?! Bottom line: no matter how delicate I try to write an email, I'm always insulting someone so...to hell with it. I'll call a spade a spade. Or the ghetto a ghetto...because that's what it is, folks. Like it or leave it.
So, a couple of days ago, I gave you a break-down of an actual deal I'm doing with an investor partner where he's coming in with $190,000 cash to cover the entire price of a building that the seller dropped from $260,000 because we were paying all cash (and because the property was on the market for 7 months with no offers to date...except ours!)
Here's another one I'm working on for one of the 3 investors I was telling you about that felt a little jilted because he wasn't "selected" to participate in the kick-ass $9,479/monthly cash flow of the other deal.
This other deal is smaller. If you remember the $190,000 deal is 28 units. This other deal I'm working on is only 12 units. It doesn't mean it's any less spectacular though. The seller wants $200,000 for it. (Yeah, right!) It's 50% occupied and is grossing $28,800 per year as of right now before I do anything with the building.
My plan (and I haven't put in the offer yet but I'm actually drafting it today) is to offer the seller $140,000 cash.
Now, let me explain a couple things about this property.
1) It's a class C building in a class D area. Basically, it's in the ghetto. (I won't state where but most of you know where I tend to invest in Michigan.)
2) I've been given the preliminary docs (financials) on the property and...you won't believe this. It's been verified that the expenses are at 25% of the GOI. Freaking wow! Expenses are at about $7,200 per year right now.
3) I "walk in" with a cash flow of $1,640 per month at the paltry 50% occupancy level.
4) If I drag ass and take a full year to bring it up to, say, 90% occupancy, my cash flow goes to about $3,800 a month or almost $46,000 a year. (Some people don't even make that a year.)
Why would I bother with a crappy property like this?
The building is "newer" for this area. It was built in 1975. They just replaced the roof, windows, balconies, and carpet in all the units. And about 4 years ago they replaced the boilers. It just needs a little boost in the occupancy level.
Here are some "rules" for investing in a Class D ghetto-like area:
1) Make sure you do not buy on a "board up" block. This means that every other house or property is boarded up. Wrong move.
2) Make sure the building is still standing and not actually burned down. It takes Google Earth sometimes many years to "catch up" to the real street images in places like these so...make sure there's still a building there instead of just assuming that, because there's a picture on LoopNet.com, there must automatically still be something there. Sometimes it looks like a building is there until you see that the roof is all burned up. Not a good investment.
3) You usually can't go wrong if your apartment building is located on a very busy street. Yes, people still can get murdered there but your potential tenants would rather live near a busy street than in the middle of the woods where nobody can hear them yelling for help. (That's a joke...actually, maybe not. Truth is, your tenants want to live near grocery stores or the "party store" since many of your tenants won't have vehicles.)
4) Make sure there isn't any major structural damage, foundation cracks, parts of the interior building exposed to the elements, or major water (or storm or any other) damage that will take a fortune to fix. If there are units in the building that aren't rented, make sure they are aren't vacant because they are unrentable for reasons such as black mold, severe fire damage, or other pain-in-the-ass crap that you don't want to fix because it'll take a haz-mat and/or demo team just to deal with the unit.
5) This is the most important: make sure the property is still in service. Any out-of-service or 0% occupied property is a no-no! Now and forever! Understand? Even a 20% occupancy is still workable. However, try to stick with 50% occupied or more as a beginner.
And, of course...
6) Never offer the seller anything remotely close to what he or she is asking. This is one of these areas where you can still get away with being like Monica...the Lowball Queen! Don't feel like you're "insulting" the seller with a lowball offer because, if you think about it, their building being in existence is a insult to begin with. Isn't it an insult that the seller is putting up a property that he/she has done no work on in the last...who knows how long? Or that there's massive trash surrounding the property? Or that it looks like you'll need an African bush tribal dude with a machete to clear some of the "forest" that they've allowed to accumulate in the back of the property?
Now that's an insult to any prospective buyer! How dare they list something like that without at least cleaning it up? So...don't worry about insulting them with a lowball price of at least 25% off the asking price.
See you at the top!