14. Types to Which the Valued Formula Can be Applied

The Value Formula necessarily has certain limi­tations in its application. It is designed only for use in real estate investments for Income. This limits its use clearly. There are several types of investments which some might classify erroneously as real estate investments for income.

When one buys a motel or rooming house, this is a going hotel-type business, not a pure real estate investment for in­come. The management, care and attention that the owner or operator must apply to his business is far removed from the simple purchase of a rental property. Although an adaptation of the Value Formula has been devised for establishing the value of motels, it must be used cautiously. There are too many variants in the operation of motels. Some are open only in sum­mer, at resort areas. Others only in winter in ski areas. Others year 'round. But certain tax costs, depreciation, interest on in­vestment and other expenses run constant throughout the year. Then again there are many motels which operate swimming pools, restaurants, and even zoos!

Single separate houses, with extremely rare exceptions, are not rental properties bought and held for income. Hence they are not within the class to which the Formula applies. This type is usually bought by a family for a home, and for a figure that you could never afford to pay for it as a rental.

Duplexes and two-family houses are generally in the same class as singles. Occasionally you will find one that passes your tests and that you can buy for the figure recommended by the Formula. When this happens you can proceed as if it were an Aunt Toby. But in my experience, such properties are too much in demand by consumers, that is, people who want to live in one side, have almost complete privacy, and enjoy the assist­ance that the income from the other apartment affords them. Hence you will almost always be outbid.

Blocks of retail stores are properties bought for income, generally. However, as has been explained, there is always the serious and imminent danger of their being vacated by store­keepers who have lost business to the Shopping Centers. If your city is one where this is very unlikely, you may buy these with confidence.

Properties to which the Value Formula applies:

Aunt Tobys.
Four-family houses and those containing more than four families.
Combinations of stores and apartments or offices.
Office buildings.
Industrial buildings, e.g. those containing manufacturers, distribu­tors, plants, etc.
Commercial properties; retail and wholesale service, sales or storage companies.
Shopping Centers.

To apply the Formula to any property (and we speak only about those listed above) we first learn and list certain figures. They are:

The annual gross income (AGI); this is the total amount of rent that comes in from the property when fully rented.

The annual Real Estate tax amount: In areas where a sewer tax or other such tax is assessed in addition to the regular real estate tax, these should be added to form the total annual tax bill for our purposes. Water tax is not included, except in areas where water charges are substantial.

The Interest rate on the mortgage or mortgages that we will carry. This means that you use the interest rate and figure that you will pay on it if you are taking over the old mortgage.

The yearly fuel bill including the supply of hot water, if included. If you are buying a heated property (one in which the land­lord furnishes the heat) you should check this figure by seeing the oil bills and statements and obtaining a letter (sent by mail), from the oil supplier. He will want you to continue with him after you buy it, and will gladly furnish the figure. But you want him to send it thru the mail for obvious protective reasons. Ask him for it. He will know what you want.

The Janitor cost (per year) if any. If he resides in an apartment, figure the income from that apartment as if a regular tenant occupied it, and figure the janitor's pay on the basis of the cash he receives, added to the normal rent for the apartment, plus any utilities that you pay for. The total is the true janitor cost. Of course we try to find buildings where no such service is given the tenants, but our formula applies here and when properly used, leads to fine profits.

The yearly cost to the landlord of utilities; Electricity, gas, exterminator, and any other regular and constant cost paid by the owner.

In addition to the above figures you need to know;

Whether there is parking, outdoor or indoor.

Whether there are fourth floor (or higher) walk-up apartments, offices or lofts. As to those buildings which are built up on a perch, where you must climb 15 or more stairs to reach the first floor level, we classify those as if the first floor were the second, etc. Thus, if there is no elevator, we call the third floor the "fourth floor walk-up" for our purposes.

Whether the building is sidewalled on its exterior with wood or any other material that requires paint and care. Brick, con­crete, metal and good stucco do not come within this classifi­cation.

If the building is an Aunt Toby, or apartment house, whether the tenants must climb a hill as, for instance, from the bus stop, to reach it. As to cities like San Francisco, where practically all property is up on a hill we do not concern ourselves with this point. A tenant will not leave our building for one that is on the level if there ARE no buildings on the level.

The relative location. This will be the only factor in which you must use some judgment, and it will not be difficult. You are asked to grade the location, using the yardstick of the class of quarters you are offering for rent. This has been previously discussed. Have no fear that you can go far wrong on this. You simply decide (perhaps with your wife's help, and the knowl­edge of how long the tenants have occupied) whether this location is going to suit the people you want as tenants. How well you believe they will be pleased sets the grade. Decide whether the location for this class of tenant is:

Excellent
Good
Fair.

The only time we are concerned with grades lower than this is for appraisal purposes—not for the purpose of buying for ourselves.

The grades to be used only for appraisal purposes are:

Poor
Undesirable; very poor
Decayed or slum.

Here is the form we use for our Formula:

Section I
Step 1.   Find Annual Working Income:
Enter Gross Yearly Rents here                            $
Yearly Taxes and Utilities supplied (*For furnished apts. see below) enter total here                                                                         $
Deduct Tax & Utility total from Gross Rents Balance is annual working income (AWI) enter here                                                  $

Step 2.  List Above-normal Expenses. Fuel is Loss Factors.
Enter any Annual Mortgage Inter­est above 6% here                 $
Enter any janitor cost above 7% of AWI here                            $
If Wooden Exterior enter 10% of ANNUAL WORKING INCOME (AWI) here                                                                  
If Building is reached by hillclimb enter 1% of ANNUAL WORKING
INCOME here                                                                           $

DEDUCTION FOR LOCATION:
For Excellent Location 0% of AWI For Good Location            5% of AWI
For Fair Location_____                                                            10% of AWI
For Poor Location                                                                  25% of AWI
For Very Poor Location                                                            40% of AWI
For Decayed or Slum Location                                                 50% of AWI $___
(If Heated) Enter Entire Fuel BUI Here                                                                $
If building contains 4th floor walk-ups enter 20% of the 4th floor rents here        $
If building contains 5th floor walk-ups enter 30% of the 5th floor rents here        $

Step 3.  Add all items in Step 2 and enter total here          $_______           

Step 4.  Subtract from Annual Working Income.
Balance Rox PAIis Primary Adjusted Income. Enter here $_______

Section II   Addition of Extra Profit Items and Factors

Step 5.  List Extra Profit Items and Factors
Any mortgage interest saving under 6% enter annual saving here     $___           
If Parking or Garages available, 1 per tenant, whether free or not.
for Parking enter 5%;
for Garages 8% of AWI                                                                $___
If Janitor Service is not supplied enter 5%  of AWI here                 $___          
If all electric bills are paid by the tenant  enter 2% of AWI here      $___
           
Step 6.  Add total of all items in Section II including PAI. Total is Final Adjusted Income. Enter here

Step.7 .Multiply Final Adjusted Income by 6% (or divide by 3 and multiply by 20). Result is GROSS VALUE. Enter here

• Where furnishings are supplied with apartments include annual cost of replacing and repairing furniture and furnishings.

Step 8. Enter cost of repairs required to put property in reasonable condition here

Step 9. Deduct cost of repairs from Gross Value. Balance is Fair Market Value of Property .Enter here

Copyright 1960. Order these forms direct from: Real forms, Box 1, Brookline, Mass.

Let us do the Value Formula for a typical Aunt Toby un-heated and for a heated one to see how it works. Here are the figures on the Freeman group of Aunt Tobys as they were pre­sented to me by Jack.

Income rents per year                                                                                   $5,880
      Taxes                                              $721
      Water                                              $60
      Insurance                                       $113

1st Mortgage,  Interest,  and  Principal  $24,000 at 4% standard rate in those days) 20 year basis                                                                                   $1,752.48
Interest and Principal on 2nd mortgage at 4%, 10 years                              364.56

There was no janitor service, heat, nor even decoration sup­plied by the owner.

The location was excellent by the yardstick of this price and standard of apartment. There were no apartments above the third floor (2 flights of stairs) level lot. No hill climb. 3, 4, and 5 room apartments. Plenty of open air parking.

Value Formula for 126 Browne St. and 214 through 222 Free­man St.

Section I

Step 1.  Find Annual Working Income (this is called AWI)
Gross yearly rental income                                                         $5,880.00
Deduct: taxes and utilities supplied                                               $721.00
Annual Working Income                                                           $ 5,159.00

Step 2.  List Above-Normal Expenses and Loss Factors:
Yearly Mortgage Interest above 6%  (my mortgages were 4% at that time)                                                                                              $00.00
If   wood   exterior    (they   were) 1035 of AWI                           515.90
If Building contains 4th floor walk-ups  (there were none)               00.00
             Ifbuilding is reached by a hillclimb place 1% of Annual Working
             Income here                                                                                  00.00
             Deduct for Location: Excellent Location 0%                                  00.00

Step 3.   ADD items in Step 2 and place total here .              .    $    515.90
Step 4.   Deduct total from Annual Working Income.
This is the Primary Adjusted Income, place in                              PAI
PAI here                                                                                     4,643.10

Section II. Addition of Extra-Profit Factors

Step 5.  List extra-profit factors
Any Mortgage Interest saving under 6% (2% of 27,000 per year) 540.00
If parking or garages available (There is park­ing) (5% of AWI)   257.95
If all electric bills are paid by tenants (they are) 2% of AWI        103.18

Step 6.  Add PAI and items in Step 5, place total here.
             This is final adjusted income                                                    $5,544.23

Step 7. Multiply final adjusted income by 6% (or divide by 3 and multiply by 20).
             Result is Gross Value                                                              $36,961.40

Step 8.  Place cost of repairs required to put property
             in reasonable condition here                                                       $600.00

Step 9. Deduct cost of repairs from gross value.
             Bal­ance is fair market value of property                               $36,361.40

Having established that I could safely pay $37,000 for this property and make a fine return on my investment, I "figured the net" on the property to learn just how much I would clear net in hand if I offered and paid $30,000. We will soon do just that on this unheated Aunt Toby, but at the moment we are concerned with the application of the Value Formula to a heated property. Let us apply the Value Formula to No. 16 which I bought from Mr. L.

The facts and figures on No. 16 (at that time) were:

Eleven four room suites renting for $39 to $49. (These rents were then controlled at this level.) Owner supplied heat, but not hot water nor janitor service. Small level lot with parking. Three suites were fourth floor walkups. There was a part-time janitor who took care of snow, put out the rubbish barrels for collection and no more. He was paid $15 per month.

Value Formula for 16 High St., Brookline. Heated Property.

Section I

Step 1.  Find   Annual   Working   Income:

Enter Gross yearly rents here                                                      $6,000.00
Deduct-Yearly taxes                                                                   $807.00
Electric for halls                                                                          $71.00
Total                                                                                          $878.00
Balance is Annual working income (AWI)                                $ 5,122.00

Step 2.  List above-normal Expenses, Fuel and Loss Factors;
Enter any mortgage interest above 6%                                        $00.00
Enter any janitor cost above 1% AWI                                         $00.00
If wooden exterior 10% of AWI                                                  $00.00
If Building is reached by hillclimb 1% of AWI                              $00.00
Deduction for Location: Rated Excellent                                       $00.00
Entire annual fuel bill                                                                     $715.00
If Building contains 4th floor walk-ups enter 20% of 4th floor rents
here                                                                                             $252.00

Step 3.  Add All Items in Step 2 and enter total here              $967.00

Step 4. Subtract Above Normal expenses, etc. from Annual Working Income.
This is primary ad­justed income. Enter in Box PAI here          $ 4,155.00

Section II.   Addition of Extra Profit Items and Factors

Step 5.  List extra profit items and factors:
Any mortgage interest saving under 6% 1% of $19,000            $285.00
If Parking available 5% of AWI                                                  $256.10
If Janitor Service NOT supplied 5% of AWI (we do supply partial service)
If all electric bills are paid by tenants (they aren't).

Step 6.   Add all items in Sec. 2 including PAL Total isfinal adjusted income. Enter here                                         $ 4,696.10

Step 7. Multiply Final Adjusted Income by 6% (or divide by 3 and multiply by 20).
             Result is gross value. Enter here                                     $31,307.32

Step 8.   Enter cost of repairs required to put property
             in reasonable condition here                                              $00.00

Step 9.  Deduct cost of repairs needed from Gross Valu.
             Balance is fair market value of property                        $31,307.32

Now it becomes apparent why Mr. L. would not have been permitted to walk out of my office without having signed up even had he insisted on 26, 28, or $30,000. When we do the Net in Hand calculation, it will be even more apparent.

It should be borne in mind that the interest rates noted above were current and normal in this area at the time I bought these properties. Of course, they are not now available, nor are taxes as low as they were then. Fuel costs much more today too. But by the same token, rents are substantially higher too and it all balances out beautifully.

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