Apartment Building He Wants to Buy Seems to Have High Turnover
QUESTION: I am considering investing in a low-income apartment building. The cash flow is tremendous. But I realize the building is very management intensive. However, after reviewing the seller’s financial statements and federal income tax returns for 1988, I calculate the average apartment turnover is at least three times per year per apartment.
Although the down payment is very low and I would earn at least 25% on my money, do you think this is a good investment?
ANSWER: The property you describe is obviously a low-income slum property. I can’t advise you to buy or not, but a tenant turnover of three times per year per apartment is far too high. One or two turnovers per apartment annually is not excessive, but the building you describe has too many tenant move-outs. Something is wrong. Tenant move-outs are expensive since the apartment must be cleaned, repaired and painted for the next resident. Unless you can handle that management-intense building, I suggest you keep looking.
Check From Agent Should Never Bounce
Q: A realtor manages several rental houses for me, as I have moved away from the area where they are located. She collects the rent, deducts her 10% management fee, and sends me her check for the balance. But twice in 1989 the realtor’s checks have bounced. Both times I redeposited them. The first one cleared on the second try but her August check was rejected on the second attempt for insufficient funds. When I phoned her, she said there was a mistake and she sent me a second check which didn’t bounce. Do you think I should be concerned?
A: Yes. A realtor’s check should never bounce. The realtor is either a sloppy bookkeeper, has her checking account with a bank that makes mistakes, or is in financial trouble. Since your rent money must be deposited in a trust account, there should always be sufficient funds in that account to pay your share of the rent collected. It is a serious matter when a realtor’s check from a trust account bounces. I suggest you report the matter to the real estate commissioner for investigation.
Vacation Development Uncertain Investment
Q: During our summer vacation, we visited a large new recreational development that is very attractive. The lot prices start at $55,000 and go up to over $100,000. This is a high-class project. The model homes are beautiful. The down payment is only 5% and the developer will finance the lots for 20 years at just 9% interest. Do you think this is a good investment?
A: No. Don’t be fooled by those nice model homes if the developer is selling lots, not houses. Recreational developments usually are not good investments, except for the developer.
A major problem with the financing you describe is if you need a mortgage to build a home on a lot you purchase, the developer’s attractive lot loan will have to be paid off because most lenders won’t make a second-mortgage loan for home construction.
Another difficulty is if you should want to sell your lot in the future, you will be competing with the developer’s unsold inventory and his large advertising budget. Please invest only money you can afford to lose.
