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Valuing a repossessed property portfolio
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A bank forecloses on a developer or landlord for some reason

They then obviously have to recoup as much value as possible, so they place it with an auction house or broker and it says something like this:

10 apartments
All rented
Gross income 100k
Yield 10%
Offers in excess of 1m

Now, a 10% return in London is insane given the best is probably 2-3%, so they are obviously looking for a number in excess of the 1m

How would you determine a sensible number?
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Re: Valuing a repossessed property portfolio [Andrewmc] [ In reply to ]
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The reason it is foreclosed on is because it would have a negative cash flow with any mortgage for multiple years. At a net incoming of ~$50K, I can't believe that people would be putting 1m on that property. Your London property must be insanely over priced.

If paying cash, 1m to 1.2m seems reasonable to have a decent IRR ~7% and Cap rate ~6% assuming some appreciation. With that said, assuming appreciation is a big risk. You can use this calculator.

https://www.calculator.net/rental-property-calculator.html
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Re: Valuing a repossessed property portfolio [Andrewmc] [ In reply to ]
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In addition to what the poster above me said, also take into account market rental rates, the history of those rental rates, market occupancy rates, replacement cost, and any differed maintenance.
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Re: Valuing a repossessed property portfolio [shoff14] [ In reply to ]
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It was just illustrative but yields in London are under 3% and cap appreciation is negative, the yields have been about that for last few years but growth was much higher. 120% from 2010-16
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Re: Valuing a repossessed property portfolio [GreenPlease] [ In reply to ]
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So I was doing rental rate comparisons and attempting to look at the value of comparable individual units for sale

I think the seller has to use cost /sq m and yield as the two biggest guides

Between the two should be a close approximation of guide price
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Re: Valuing a repossessed property portfolio [GreenPlease] [ In reply to ]
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GreenPlease wrote:
In addition to what the poster above me said, also take into account market rental rates, the history of those rental rates, market occupancy rates, replacement cost, and any differed maintenance.

Agreed, if rental rates could be raised say 20% and still maintain +95% occupancy rates, then say .5m down + mortgage. It would reduce the negative cash flow year to year 2/3 time frame. With depreciation instead of appreciation. It still makes zero sense at 1m+.
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Re: Valuing a repossessed property portfolio [Andrewmc] [ In reply to ]
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Also be sure you look at the income through the lens of Net Operating Income and not Gross Income. Be aware of all of all of the expenses of operating the property.
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Re: Valuing a repossessed property portfolio [Andrewmc] [ In reply to ]
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From what you described, I would put my money elsewhere. Why invest in real estate when the return is only 2-3%?

Sounds like a sellers market right now.

Google Net Operating Income (NOI) and Cap Rate.

Work the formulas and you can back into the formulas with your desired cap rate.
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Re: Valuing a repossessed property portfolio [shoff14] [ In reply to ]
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I don't understand your point

If it returns 10%

If an interest only mortgage is 2.7-3%

If you want cash flow. On 500k your mortgage payments would be 15k off an income of 100

Given I am not sure there is anywhere in the UK yielding more than 7% with London at 2-3% why wouldn't you do it?

(and I'm not doing this but I am trying to determine how they are identifying their target price)
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Re: Valuing a repossessed property portfolio [jharris] [ In reply to ]
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It's a buyers market with stagnant falling prices and low rental yields.

Ken Griffin just got 55m off the original asking price of a London house and I suspect he got 20-30% off another apartment on Hyde park
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Re: Valuing a repossessed property portfolio [jharris] [ In reply to ]
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NOI and cap rate are yield.

In 2010 the yield on my apartment was 12/155, when I sold it to another investor it was 12/330

My house went from 30/550 to 60/1200

So over eight years the yields dropped from 7.7% to 6.6% on the apartment and 5.5% to 2.5% for the subsequent buyers.

So 10% on 1m seems good.
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Re: Valuing a repossessed property portfolio [Andrewmc] [ In reply to ]
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Andrewmc wrote:
I don't understand your point

If it returns 10%

If an interest only mortgage is 2.7-3%

If you want cash flow. On 500k your mortgage payments would be 15k off an income of 100

Given I am not sure there is anywhere in the UK yielding more than 7% with London at 2-3% why wouldn't you do it?

(and I'm not doing this but I am trying to determine how they are identifying their target price)


Right now in the states, you couldn't touch a 3% interest loan. Something under 4 would be impressive. Could probably be done with an adjustable rate.

Gross income = 100k
management fee 10% = -10k
Taxes = -20k
maintenance 1k/unit/year = -10k
insurance = -5k
Mortgage = -30K
Net income = 25k

Laying out 500k to get a positive cash flow of 25k? no thank you.

Unless there are something drastically different in how much the tenants cover vs. landlords in the UK vs. the US.

They are probably in it too far, just like the previous owner and trying to get everything they can out of it. If that means holding out for someone to throw stupid money at it, then so be it.
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Re: Valuing a repossessed property portfolio [Andrewmc] [ In reply to ]
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Is this a portfolio or a 10 unit building?

Maurice

http://www.multisportsolutions.com
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Re: Valuing a repossessed property portfolio [mauricemaher] [ In reply to ]
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I've seen both. Very similar financial high level details
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Re: Valuing a repossessed property portfolio [shoff14] [ In reply to ]
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In the UK current buy to let mortgages are 2.7 fixed for two years to 3.3 fixed for life of mortgage interest only

On, for arguments sake, 1m, that would be between 27 and 33k a year.

So if the portfolio were 1.58m yielding 10%, as is claimed, that's 158k, minus mortgage interest, maintenance, lettings fees, accountants fees, salary for management and dividends before paying Corp tax.

Certainly at 1m plus I don't think owners are paying management fees, they're professionals looking after all aspects themselves.

I'd guess on 1m sterling with 100k in revenue it would be something like:

Insurance if a single block 600 /Yr for buildings
Mortgage 20k
Management fees 0
Tenant findng fee 3-4%
Maintenance 1% or 10k
Taxes are on company profits

I'd guess net income is closer to 50-70k than 25k.

Either way, I know yields are exceptionally low, interest rates are low, taxes are only paid on retained profits.

I think they are looking for someone to offer a price at a yield of 3-4% rather than the 9% it suggests

I think they are saying "offers in excess of" 1m with a yield of 100k / 10%

But they are looking for offers up to 2.5m where the yield would drop to 4%
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Re: Valuing a repossessed property portfolio [Andrewmc] [ In reply to ]
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We have pretty high property taxes in the majority of the US. Commercial property is typically taxed at higher rates than residential. So even in the good property tax states, commercial property taxes can be the difference between good/bad investing.
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Re: Valuing a repossessed property portfolio [Andrewmc] [ In reply to ]
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Andrewmc wrote:
I've seen both. Very similar financial high level details

This is what it would look like for me in Kamloops BC (interior)

10X 1 bedroom at 800$ =96k
Coin laundry at 4k

33% down 667 k mortgage at 4.5 = 44k
City taxes at 10k
City utilities at 10k (garbage, water, sewer)
Insurance at 6k

So, Looking at 30k for me before maintenance, management, head aches, personal time etc.

I've made things work well in residential at 8.5%-10% but I am an electrician and work in facilities, so I only bought problematic properties that I could add value to (do everything myself) that were less than a 10 minute drive.

Like you when my cap rates sunk to 2-4% I sold everything because the capital appreciation was to hard to ignore...that was in 2010, I have been waiting 9 years to find something locally that is attractive.

Cheers,
Maurice

http://www.multisportsolutions.com
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