Renee Burrows of Nevada Realty Solutions presents a 4-plex in the City of Las Vegas. It is offered for sale at $455,000. It is located near the Strip and UNLV so it is convenient for both casino workers and students.
Annual Income Analysis: 3 two bedroom units, rented at $625/mo. and 1 three bedroom unit, rented at $725/month. The property makes $800 annually in other income (laundromat?). They assume a vacancy factor of 5%. Total annual income= c. $30,000
Annual Expense Breakdown: Taxes at $1,648, Insurance of $900, Maintenance at $400, Utilities of $1,500, and Trash of $144. Total Annual Expenses = c. $4,600
Net Annual Operating Income= $25, 400
Okay, what's a good price to pay for this property?
1- Zillow says it's worth $438,000...whatever.
2- It was bought about 18 months ago for $417,000, Ouch! Listed at $455,000, it's priced at 9% higher than list price. That sounds like the owner is just trying to get out of the deal without a loss. Selling that quickly for no profit leads me to believe that there may be a problem. Maybe not. The owner could have personal reasons to sell but the quick sale seems mighty suspicious. The prior sale was for $180,000 in 1998. Whew! That makes us feel a bit better. That ten year appreciation is in line with Vegas real estate. The owner has equity in the property so there won't be a short sale consideration if we lower the price.
3- Oh! It was built in 1963. Perhaps there is some deferred maintenance? Lets assume $10K per unit and $10K for the building (an inspection will reveal more but we have to set a price before inspection). We're GUESSING at $50,000 in expected maintenance for the next five years.
4- Let's use a ten-year, interest only loan at 7.25% (7.45% apr). That would be $6.02 per thousand for the monthly payment. We have NAOI of $25,400 or monthly NOI of $2,116. Okay, divide $2116 by 6.02 and we have a max loan amount of $351,500. Divide that loan amount by.8 (to reflect a 20% down payment) and we get a max price of $439,375.
5- My guess is that a good price to pay is between $390,000 (to reflect my GUESSED deferred maintenance) and $440,000. Renee reports that the Vegas rentals market is tight. If she feels that rents can increase some 10% from these figures in the next year, the deferred maintenance issue may be null and void.
Point of interest. I did not figure the tax benefits of depreciation into this equation. This can add more to the value. I'm guessing that an investor, offering as high as $440,000, with about $95,000 for down payment and closing costs will have positive cash flow. That means he can weather any downside Vegas may have left while still "getting into the game" of a growing economy. Again, Renee reports that rentals are tight in Vegas; the time may be correct today and the upper end of $40,000 may be justified.
So I want a 15% annual pre-tax return. This means I want to clear $400,000 in ten years. Assuming a 10% cost of sale, I need to sell for $925,000 by 2017. That's a little more than a double in price. Since price is a function of rents, can those rents double by 2016, Renee?
Disclaimer: This is an exercise. I am not a licensed real estate broker nor an real estate investments specialist. I'm a mortgage originator with a history of securities brokerage and real estate investments owner. I have a BS in Finance. This exercise is offered as a forum for discussion. I have no doubt that there will be many opinions, analysis, and discussion in the comments section. Please remember to critique the ideas and the investment analysis. There will be no ad hominem attacks allowed in the comments section. This is not an offer to sell real estate.
