January/February 2005 Living Now
Merging Spirituality & Real Estate:
Conscious Connections in Multi-Family Investment Property

by Saundra Valentine

Conscious Intent

As I research multi-family properties in various neighborhoods for clients, I have run across a wide range of landlords. Take one of my clients for starters. Each property she has purchased, she has cared for and nurtured as if it were her child. When I previewed one such property in the Sullivans Gulch area, the original bath tub from the 50's was getting a surface refinishing to bring it back to its' original condition. Every nook and cranny inside and outside her properties was given such attention. She enjoyed pampering her properties with a conscious joy & love for their well-being (the properties), while the tenants well-being obviously benefits in this relationship, too.

And then there is the extreme opposite on the continuum. I called one agent to get the annual expenses for a property, and the seller's agent responded, "Well, he doesn't actually have any. He doesn't do much." !!!

Conscious Investments: The Numbers

Conscious intent can only be actualized when the numbers pencil out, and allow for the proper maintenance & care of the property. These are the key numbers you will want to know about multi-family investments: 1) Annual Rents; 2) Vacancy Factor (History); 3) Annual Expenses; 4) Net Operating Income (NOI); 5) Sales Price; 6) Down Payment; 7) Loan Amount; 8) Monthly Mortgage Payment 9) Cash Flow Before Taxes (CFBT); 10) Cash Return on you Initial Investment - Cash on Cash Return.

Below is a spreadsheet reflecting a positive cash flow on a 5-plex in NE Portland that sold this year.

scheduled rents-annual

36,240

plus misc. income

0

minus vacancy (2%)

725

equal gross rental income

35,515

less expenses (excl.debt)

6,552

equal net oper income(NOI)

28,963

   

sales price

380,500

NOI divide by sales price =

 

equals ~ capitalization rate

0.076

   

sales price

380,500

less down payment

76,100

equal loan amount

304,400

equal annual mtg payment

23,812

   

noi

28,963

less annual mortgage

23,812

equal cash flow before

 

taxes (CFBT)

5,151

   

CFBT

5,151

divided by down payment

76100

equal cash on cash return

0.068

The above property reflects ideal numbers. Note that the cash flow from the rental income: 1) pays both the expenses & the mortgage payments & provides excess cash reserves for unexpected maintenance & repairs. 2) a Cap rate at 7.6% is within the desired range of 6 to 10%; and 3) the return on the initial investment, the down payment of $76,100 - is a reasonable 6.8%, in addition to contributing to future equity on the property.

Conscious Connections

Sometimes, the numbers are not the priority. The aesthetic appeal of a property can be what attracts the buyer, such as the charm and character seen & felt in old Portland historic homes & plexes. Or the location, especially if it is to be owner occupied, can be more important than the numbers.

Bringing together like minded spirits, who otherwise would not qualify financially, to purchase a duplex, tri-plex or a four-plex, is frequently coming into my field. Several clients I am working with are considering this option. I like to call this "Conscious Connections" ~ connecting and forming relationship via real estate investments.

As an example, let's say you could qualify to buy a $100,000 home. At 5% down or $5,000, and at a 6.5% interest on a $95,000 loan, your monthly payments would be about $600. In todays' market, this might be a condominium. But four buyers joined together, pooling their buying power, could purchase a $400,000 home that is currently a four plex or one that could be converted to a four-plex. The Conscious Connection could be to live in and create a home, an investment & a communal connection, or it could be for investment purposes only.

Buying & Selling Multi-Family Properties

Most offers on multi-family properties are made prior to an inspection of the property, in order to avoid an entourage of realtors & potential buyers continuously invading the tenants' privacy & their sense of space of one's home. The offer is written subject to 1) an interior inspection; 2) a review of two or three years of financial statements, and/or tax returns; 3) a professional inspection; 4) subject to buyer & appraisal qualifying for a loan (unless a cash offer); and 5) other contingencies unique to the property.

Properties with two to four units are considered residential and comply with the same process as purchasing a single-family home. Properties of five units or more are considered commercial property and have different loan application requirements & costs.

If you have questions abput multi-family investment property, please call or email. Saundra Valentine is a RealtorŪ~Broker with SunsetWest Properties and can be reached at 503-892-3037 or email: wowsaun35@msn.com.