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Real Estate Investing Forums | Real Estate Investing | Rehabbing, Landlording Forum (Moderators: $Cash$, Bluemoon06, kdhastedt, Mdhaas) | Topic: Anyone own a rooming house - is this a good deal?
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NJbird_dog
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« on: August 06, 2017, 07:56:38 PM »

NJ is a competitive market and double-digit CAP rates are not common.

There's a rooming house in my town that is going for $800,000.

Gross income: $150k
Expenses: $55k
Net income: $95k

That's about a 12% cap rate if this house is purchased cash.

I would finance it.
25% downpayment = $200,000
$600k @ 5% for 20 years = $4,000/mo

That leaves about $4,000/mo net profit.
$48k/yr for $200k cash investment is about 25% CAP.

A rooming house comes with the challenge of maintaining multiple rooms/tenants/etc. But this rooming is a 5minute walk from where I live. And I believe I can target a niche crowd of tenants who aren't deadbeats/drug abusers/etc. And I would have a superintendent live in one of the rooms to manage the property. It's currently managed by an absentee owner who has owned it for decades and it operates just fine.



Any thoughts on this investment? Please avoid discussing deadbeat tenants/etc. I have good reason to believe that I'll be able to attract consistently decent tenants.

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javipa
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« Reply #1 on: August 06, 2017, 09:03:44 PM »

The turnover and expenses on something like this are more similar to a motel.  Thus your expenses are likely to be above 50% of the scheduled rent.

Notwithstanding, you would need to verify the seller's expenses by having him provide his Schedule E tax return.

Invariably when I've asked for a tax return, the seller will tell me that he expensed other properties against that tax return and that they are abnormally high.  I say, "Sure," and assume it's accurate.  Otherwise, the seller is committing fraud.

Never mind a lender will want to see the tax returns for the last three years anyway, as a condition of financing.

You didn't mention how many 'rooms' in this boarding house.  This makes a big difference on the management overhead you can afford, not including maintenance personnel.

I would say your actual NOI at the time of purchase will be more like $75K not $95K, and to maintain a 12 cap, the price needs to be more like $625, not $800.  Just saying.

If the seller is saying it's a 12 cap, then you say, "Great, but in order to buy at a 12 cap, the price needs to be $625K, based on realistic numbers; not your pie in the sky, unicorn estimates."  Maybe you'd say that differently, I don't know.

Of course, if you can find comps that support the seller's numbers, that makes a difference. 

FWIW
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NJbird_dog
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« Reply #2 on: August 07, 2017, 08:18:04 AM »

The turnover and expenses on something like this are more similar to a motel.  Thus your expenses are likely to be above 50% of the scheduled rent.

Thanks for your insights. This house has relatively long term tenants, some who have been there for years and others who pay on a weekly basis but have been there long term. It's in a nice area, bus transportation to NY across the street and major redevelopments planned right across the street from this rooming house (movie theaters, restaurants, etc that hasn't been publicized yet). And here's the kicker - the owner is an elderly lady who still uses newspaper ads to find tenants and operates this as absentee. I can most definitely improve the operations and make it more efficient.

You didn't mention how many 'rooms' in this boarding house.  This makes a big difference on the management overhead you can afford, not including maintenance personnel.
17 rooms and 5 bathrooms.

Getting this house for $625k would be a steal. I'd love it but it won't happen. To give you an idea, the Seller has had it on and off the market for the past 10 years in prices ranging from $1M down to the lowest price - $849k, from which I'm sure she'll accept $800k but I think $750k is possible.

Great point in asking for the Schedule E but I highly doubt the Seller reports all income. I know the area well enough to understand the potential rental income from each room.

What are your thoughts on a rooming house overall? Let's assume I pay $750k for it. Considering it's a turn key operation and cash-flowing from day 1, I think it's not a matter of getting it at the best price but at a reasonable price. And I'm being overly optimistic but I believe once the new developments take place, this rooming house can be an attractive option on AirB&B which will significantly increase cashflow.
« Last Edit: August 07, 2017, 08:32:32 AM by NJbird_dog » Report to moderator   Logged
javipa
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« Reply #3 on: August 07, 2017, 10:06:54 AM »

The seller's been trying to sell for ten years, and he still owns the property?  Pffft.  He's been asking too much, and still is.

Don't say "no" for the seller.  Offer him what it's actually worth, not what you think he'll accept.  Otherwise, you're falling in love with the project, or the idea of owning this management nightmare.

Five bathrooms and 17 rooms.  That's just a cry for a headache.  Please don't overpay for this.

I can guarantee the expenses are more than 50% of the scheduled income, if he's got long-term tenants in the building.

He's failed to raise the rents in order to reduce his turnover.  If your desire is to pay off the mortgage with rent money, and you're not terribly concerned with cash flow, that's great.  That's a legitimate investing strategy. 

Meantime, it's impossible to weigh in much more, without knowing comps, the condition of the building, location, and how willing you are to donate time and money to the management and maintenance, etc. etc.  17 rooms cannot support full time management and maintenance ...unless the building was free and clear.

There isn't much here at $750K, much less $800k.  You need to be in the mid $600k range, and even then, that's not anything spectacular.

This is an old D-category project; obsolete structure; that's difficult to manage, if you want actual, spendable cash-flow.  There's a reason this guy has not sold this hell hole in ten years time, and it's not just the price.

This is $47K a door and the rents are ONLY $150,000?

$800,000 PRICE
$200,000 DOWN
$600,000 BALANCE
$51,583   DEBT SERVICE (6%, 20/YR)

  $150,000   GSI
  <$75,000> EXP
=  $75,000   NOI
  <$51,383> DEBT SERVICE
=  $23,417   ANNUAL CASH-FLOW

11.7% COC RETURN
9.3% CAP

OR

 $625,000 PRICE
 $160,000 DOWN
 $465,000 BALANCE (20YR, 6%)

  $150,000   GSI
  <$75,000> EXP
=  $75,000   NOI
  <$39,600> DEBT SERVICE (20yr, 6%) 
=  $35,400   ANNUAL CASH-FLOW

22% COC RETURN
12% CAP

Either way, you're buying a job. 
« Last Edit: August 07, 2017, 10:13:19 AM by javipa » Report to moderator   Logged

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davewindsor
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« Reply #4 on: August 07, 2017, 02:07:34 PM »


Getting this house for $625k would be a steal. I'd love it but it won't happen. To give you an idea, the Seller has had it on and off the market for the past 10 years in prices ranging from $1M down to the lowest price - $849k, from which I'm sure she'll accept $800k but I think $750k is possible.

A good indicator of whether he'll budge on his price is finding out what's his motivation is for selling and doing a title search to find out what he paid for the property and how much of a mortgage there is on it.

I find that 90% of sellers have "gambler's syndrome" when it comes to selling property regardless of the market--refusing to exit until they at least break even with their losses.  I'm wondering if that's the case here because he's been holding out for the past 10 years.   If he paid $750K for it, it's unlikely he'll sell for $625K especially if he has a mortgage on it for a lot more than $625K.   But, if he bought it for $400K, you have to wonder what's his motivation to hold out for as much as he is as long as he has.  If he's having serious health problems now or his wife is suing him in a divorce, that also might change his motivation to accept a much lower price than he would a couple years ago.   It's important to get more information about the seller.   Offer him a free dinner if he'll sit down and talk to you.  Build rapport.   Get more information about him.  It's also helpful to you to let you know if you're wasting your time with this property.   

You also might try to probe him on what he wants the money for.   Maybe you can get a little creative here.  Is a trade possible?  If he wants the money to buy a million dollar condo in Hawaii with certain criteria, perhaps, you can structure an offer where you negotiate with the owner of that condo and work it down to $600K and some escape clause if the owner of the rooming house changes his mind and trade the condo for the rooming house.

 
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Real Estate Investing Forums | Real Estate Investing | Rehabbing, Landlording Forum (Moderators: $Cash$, Bluemoon06, kdhastedt, Mdhaas) | Topic: Anyone own a rooming house - is this a good deal?
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