Recently we started working with a client who had made 1 all cash offer on a small Condominium. He was looking for what he considered to be a “Steal” of a deal. This client’s goal is to buy Short Sale or REO properties with All Cash Offers up to 1M assuming these would provide the best returns. Our client’s goal was to ascertain how good of an investment had he made in the specific condo purchase and should he look to other larger complexes for better returns?
Below, I created an analysis between 2 Currently Active 4-Unit Income Properties in Orange County and 2 Condo’s one of which he is now in escrow on.
As an investor be sure to perform a complete analysis on the properties you are considering purchasing as well do your homework on the entire market and surrounding neighborhoods to be fully prepared to make an educated offer.
Sale Price & PITI Comparison
Condo A Condo B 4-Unit #1 4-Unit #2
Price $141,900 $175,000 549,000 $749,000
Down 100% 100% 100% 100%
Loan $0 $0 $0 $0
Int. Rate 4.75% 4.75% 4.75% 4.75%
ADS* $0 $0 $0 $0
Taxes $1,546 $1,907 $5,984 $8,164
Insurance $300 $300 $1,600 $1,600
*ADS – Annual Debt Service
Income & Expenses (Based at 40% Expense)
Condo A Condo B 4-Unit #1 4-Unit #2
Income $14,400 $15,600 $63,500 $74,685
N.O.I* $8,640 $9,360 $38,100 $44,811
*N.O.I – Net Operating Income: This amount equals Income (Rent, Laundry funds, and any other collected income) less all expenses including Taxes & Insurance. Typically Income properties run between 30% – 40% of your Total Collected Income which is called your Gross Scheduled Income. 40% is a conservative number. Many banks in reviewing Revenue numbers when processing a loan will assume 40% of the total income as the expense ratio.
In this example as the buyer is buying with 100% Down Payment hence the N.O.I will also be the same as the Annual Income as there are no loan payments to be deducted.
Condo A Condo B 4-Unit #1 4-Unit #2
Ann. Profit $8,640 $9,360 $38,100 $44,811
Mo. Profit $720 $780 $3,175 $3,734
Return Analytics
Condo A Condo B 4-Unit #1 4-Unit #2
Cap Rate 5.99% 5.26% 7.52% 6.48%
G.R.M 9.85 11.22 8.65 10.03
Location & Description
All properties would be considered C+ to B- properties. Condo Age was 20 years old as compared to the Income properties which were twice the age however they appeared to be in solid condition with a good mix.
Summary
Just because a property is a “Short Sale” or an “REO” it doesn’t necessarily mean a property is a “STEAL”. For every investment you need to be aware and calculate for all the expenses as well as possible improvements. Especially in a market where some areas are prone to higher Vacancy rates you definitely need to boost up your expense percentage of Gross Scheduled Income to assure that you are going to get the returns that you are looking for.
One more note: When buying a Short Sale or REO you are likely going to be buying the property in “As Is” condition. So if you are not completely comfortable with making improvements on a property or rehabbing units once they become vacant then make sure you locate a Qualified Property Manager to help manage your investments properly.
Patrick Schwier
Broker/Multi-Family Investment Specialist
Web: www.schwierassociates.com
Blog: http://incomeproperties.wordpress.com/
Email: patrick@schwierassociates.com
Cell: 1.714.401.0893
Ph: 1.888.558.6487
