To Become Wealthy: A Better Property in Dallas

I have spent the last two weeks looking over one very good property. We are about to bid on it. I have gone over all sort of numbers and asked all sorts of questions and learned all sorts of info about it.

It is a 15 unit building that has had some work done to it over the past year to each unit. I am not-so-secretly proud of myself for finding it. Now I just hope that all of the details of the bidding process and purchase go thru.

Here are some numbers:
Gross Scheduled Income: $82,200
10% estimated vacancy : $8,220
(only one unit is currently vacant)
Insurance: $4,500
(based on current coverage)
Taxes : $6,630
(based on current year)
Utilities : $4,620
(elec for common areas, water/sewer, garbage)
10% for property manager: $8220
NET OPERATING INCOME: $50,010

The current asking price is $425,000. At that price, with 15% down and a 30yr fixed mortgage at 7.5%, we would pay $30,310.92 for the year, leaving us with approx $19,700 pre-tax profit for the year. We have no plan on bidding that much, but it is the amount that I use for my calculations.

Our wonderful realtor has sent me some background info on the property. The current owner bought the property in Sept. of 2005. He purchased it for $204,000. Since that time he has put in $66,000 to redo each unit. From what I can estimate, he did make some money off of rents collected thru the year. From the rent roll I can see that most of the units were vacant until they were redone. So vacancy has increased steadily throughout the course of the year.

I think $425,000 is a bit much to be expecting from this property, even though it is still a money maker at that price.

Here is what I am estimating his thought process to be for the money he might want to make off of this sale.
$204,000 initial purchase price
$10,000 in possible closing costs for initial purchase
$66,000 in improvements
$5-10,000 loss from vacancies
$5,000 loss due to bad property manager who can off with some money. (We heard this from the previous property management company.)

So that is a minimum of $295,000. Add in a generous $50,000 profit and we get almost $350,000. That is probably going to be what we will bid. I may even go as high as $375,000. There is also an offer from the seller for a credit to redo the outside stucco and siding.

So at the price of $375,000 and NOI $50,000, that cap rate is 13% which is pretty good. I do not yet know how to calculate the prevailing cap rate in the area, but it seems that most places use 10-12% as the average.

How does this deal sound? Much better than the last one, right?