New Memeber/Investor deal analysis

I am glad to have found this valuable real estate investing forum, I am novice and willing to learn by reading and following advice from the members who have been in my position. I thank you all.
Searching online, I found this potential deal I need your input on
36 class c multifamily unit all Bill paid property in TX 30 minutes from were I live
According to seller, %93 rented, 2 vacant, 9.1 cap rate asking $790k, from 2012 actual P&L figures are as follows:
$225,193.96 Total Income
$152,705.89 Total Expense includes tax, management and utilities, make ready
$72,488.0. Net income, seller mentioned rent is $30 below market currently between $570 to $600
What should I ask, look for, be careful off,
I am 36 years old, IT freelance consultant, works from home, have $400k to invest for passive income, no debt, wanting to retire 55, please advise Good, fair deal or stay away , what to expect in finding financing, what to offer seller based on numbers, what is the going commercial interest rate for a $350k loan? What is the average loan length, can I manage it myself and free about 30k management expense?
Novice who doesn't want to make a mistake with 10 years of savings.
Thank You

Jon Klaus

Real Estate Investor · Dallas, Texas

Moderator Donor Pro

4,797 posts
13 awards

Feb 06, 05:27 AM

Hi Michael, welcome to BiggerPockets.

There is a lot to multi-family analysis and I won't attempt to dissect your deal. I will say I do not like all bills paid deals because of the potentially unlimited utility expense. These properties can be converted to separately metered, but they tend to be older properties, and often functionally obsolete.

There is so much more to consider. It stil could be a deal, but all bills paid, is a red flag.

Jon Klaus, SellPropertyFast
E-Mail: jklaus@vnetinc.com
Telephone: 214-929-6545
Website: http://www.caddostar.com

Uwe S.

Real Estate Investor · Dublin, Ohio

Pro Basic

1,541 posts
8 awards

Feb 06, 12:09 PM

Welcome Michael to our BP world.

Like @Jon Klaus said an all bills paid propertie is not really good as investment but if you can check the last 3-5 years rent roll, P&L's and tax statements you should have an reasonably accurate general view of this propertie.
So you can decide yes or no maybe with our help.

You should visit with an (H)ouse (I)nspector this propertie to check the condition. HI want up to $1k for this visit I guess but its worth to spend. So izs possible to negotiate an lower price if he find something.

-Uwe

Brady E.

Real Estate Investor · Denver, Colorado

38 posts
2 awards

Feb 06, 12:56 PM

Michael,

From what you said in you original post I see some potential with this deal. From the numbers you gave us I see about a 10% cash on cash return as is. This is with you putting your 400k down (which I wouldnt recommend since you should keep some liquid reserves). I also calculate possible loan terms of 390k at 5.5% and amortized over 20 years.
This gives you a annual payment of around $32,160.
NOI of around $72,000.
Profit of around $39,840 for a cash on cash return of around 10%.
This is not bad for most investors.

Where I see the potential is in the high expenses. If you read these forums alot you will find that most investors agree that expenses should usually average around 50% of your gross potential income. This might not be entirely accurate for an all bills paid property. A look at the last 3 years P & L statements and tax returns will verify this. However, it could just be poor management and a burnt out landlord that have let the expenses spiral out of control. This is where the opportunity is.

If you run this same situation as above but with 50% expense ratio it looks like this:
$225,000 Gross Income
$112,500 Expenses
$112,500 NOI
$32,160 Loan Payment
$80,340 Profit for a cash on cash return of around 20%

Now that is a very good deal. Not to mention that if the 9.1 Cap that you are buying at is the market Cap, the value of the property is now around $1,250,000.

Obviously there are alot of other aspects to this deal, such as condition of the building, quality of the tenant base, ability to secure financing, etc...

But at first glance I see potential in the numbers you gave us. I say it is worth a deeper look.

Michael Hoss

· Dallas, Texas

2 posts

Feb 06, 03:09 PM

Thank you all for the replies, I have contacted the seller to get the 3 years worth of tax returns, rent roll and P&L statements, will share once received.
a closer look from 2012 P&L, what can be cleaned, are these typical expenses such as Manager Health Insurance? This property was built in the late 60's but according to seller, it has been kept up with. I hope this gives a better picture of the deal if there is one
I will do a drive by and certainly will hire an inspector if I will move forward. Do I need more than $50K reserve?

$1,500 CLEANING
$3,700 TRASH
$12,500 SUPPLIES
$10,250 REPAIRS/MAKE-READY
$1,700 PEST
$25,000 ELECTRIC
$5,650 GAS
$18,650 WATER
$800 PHONE
$475 ADVERTISING
$29,300 MANAGEMENT
$4,900 INSURANCE
$16,550 PROPERTY TAXES
$6,570 EMPLOYEE SS TAXES
$340 PAYROLL
$3,920.00 gas/phone reimb
$8,400.00 health ins
$390 Misc

$153,000 Total Expense