BiggerPockets


High Cap 6 Unit Multi Family under contract - Partner/Funds ?

Forum Powered By:

6 posts by 3 users
1004 views

To participate in forum discussions, create a free account or login.

Brandon LoCascio

Real Estate Investor from Newport Beach, California

Dec 20 '13, 10:41 PM


My brother and I have a 6 unit Multi Family deal under contract in Dallas. The purchase price is $95,000 and the cap rate comes to 10% (semi verified), with room to increase! We are planning to assume the current 1st trust deed - $41,000. Seeking a lender or partner to help bridge the remaining $54,000 gap.

DEAL POINTS:

-We have wired a $5,000 deposit

-The contract allows for 5 days of due diligence, ending this Sunday the 22nd

-Our home inspection will be performed tomorrow, Saturday the 21st at 12:00 P.M. CST

-In addition to the pending inspection, we have already received copies of each lease, receipts for expenses and the contact information for the current property manager & live-in maintenance individual. Assuming things go well with the rest of our due diligence, we will be required to close escrow by the 31st.

Here's a breakdown of current gross receipts:

Unit 1 - $600 - leased

Unit 2 - $400 - leased

Unit 3 - $495 - leased

Unit 4 - Occupied by maintenance man ($500 market value if leased)

Unit 5 - $500 - leased

Unit 6 - $495 - leased

TOTAL $2,490 / MO. (or $2,990 current market rent if fully leased)

Expenses:

Vacancy factor 10% - $249

Maintenance materials - $249

Gas 1 meter paid by landlord - $110 avg.

Water 1 meter paid by landlord - $135 avg.

Property insurance - $129

Property taxes - $259

Property manager - $450 flat feet (high!)

Trash paid by landlord - $89

TOTAL $1,670

NOI before debt service = $9,830 (33% of gross receipts)

/divided by $95,000 purchase + $2,000 cc

=

10.05 CAP

If you have an interest in helping us close the deal and/or would like more information, please reply ASAP. Thanks!



Don Konipol

Hard Money Lender from Houston, Texas

Dec 20 '13, 11:05 PM
1 vote


Do you have much experience acquiring apartment complexes? Going cap rate on these small, low income apartments is closer to 12, not 10. I personally wouldn't invest in these small lower income projects at cap less than 14. I don't see how you can possibly earn enough income to justify the time spent on this project at the price you're paying.

BTW, Dallas has gotten a lot stricter on building codes. For example, in an older apartment building if you need to redo say wiring you must do it to current code, which can mean extra very expensive costs. Also, your profit analysis did not include depreciation, a very real expense in older and lower income buildings. You have maintenance materials as an expense, but no labor cost? Who is doing the labor? If the maintenance man is doing it for the compensation of a free apartment, then you will gain no extra income by renting out his apartment as you will have to pay his labor instead.

Depreciation reserve is a real expense because the building and components do wear out and need replacing. If the building is in very good condition then 3% of the purchase price per year is what replacement of capital items will cost - on average. This brings you real cap rate down to 7. I would rethink this purchase.



Brandon LoCascio

Real Estate Investor from Newport Beach, California

Dec 20 '13, 11:29 PM


Thanks for the quick reply! It's always nice to hear a varying opinion.

A few quick thoughts that come to mind after reading your post:

This isn't a 14 cap but it can be, there's definitely upside. The property manager is being paid way too much and the maintenance guy is taking up an entire unit free of charge. Also, there is room to add an onsite laundry room for the tenants.

I appreciate the information on the building codes.

Depreciation isn't just an expense, it's also a tax write off. A hugely successful real estate investor once told me, there's four ways you MAKE money with real estate: Income, Appreciation, Refinancing and Depreciation. :-)

On that point however, you may not have seen that I budgeted 10% on the gross monthly receipts for material costs ($249 per mo.). That's actually 3% annually of the purchase price, the exact number you said!

How many units do you currently own? Let's stay in touch!



Jon Klaus Verified Moderator Donor

Real Estate Investor from Garland, Texas

Dec 21 '13, 03:42 AM


Hi Brandon. Where is it? Zip and major intersection close by?



Jon Klaus, SellPropertyFast
E-Mail: [email protected]
Telephone: 214-929-6545
Website: http://www.sellpropertyfast.com


Don Konipol

Hard Money Lender from Houston, Texas

Dec 21 '13, 06:55 AM


@Brandon LoCascio

"Depreciation isn't just an expense, it's also a tax write off. A hugely successful real estate investor once told me, there's four ways you MAKE money with real estate: Income, Appreciation, Refinancing and Depreciation. :-)"

I am going to be frank, the above comment is not only totally irrelevant to my comment about you not having accounted for depreciation, but also shows a dangerous lack of understanding of the necessity of seriously considering depreciation as a real expense. Maintenance is NOT depreciation, further allowing $249 for "maintenance materials" still allow nothing for maintenance labor.

You state the cap rate is "semi verified". What does the ACTUAL operating income and expenses show? Let me guess, the property income is low and expenses high because the property is "mismanaged". A catch all categorization every overly optomistic investor wants to believe.

By your own dubious numbers, your net before debt service is $9,000 per year. Subtract $3K for replacement of capital items, your down to $6000. Subtract $3000 per year for debt service on existing debt assumption, your at $3000. How is this amount going to provide a return on an investors capital and a return to yield. Are you looking for JV partners or a second lien?

If your question about number of units I own is a question regarding my knowledge and experience in real estate, just click on my profile. Though I concentrate on commercial real estate,i still own a 12 unit apartment complex.

I know this will fall on deaf ears as you are "in love" with this deal. It will be interesting to see how in love you are with it in 6 months. The numbers don't make sense at the purchase price.

Hopefully I am wrong, and it will be a great success. Good luck.




Brandon LoCascio

Real Estate Investor from Newport Beach, California

Dec 21 '13, 11:03 AM


@Don Konipol

Thanks! Again, very cool that you have time to spend on my post. I appreciate the feedback. To clarify, yes, the labor is currently included in the free apartment. I may or may not leave things that way, but that is the current setup.

Allow me to quote you:

"Depreciation reserve is a real expense..." Well yes, that's true. If your point is that I should have a sufficient reserve to cover these items along the way (in addition to normal maintenance items), then point received. My contention is still valid however, that depreciation will actually be a write off on our tax statement for the project/company, whether paid along the way or not.

Semi verified: This quite simply means that I am still in the due diligence process. As mentioned in the original post, I have received the leases, some receipts and I have spoken to the property manager regarding specific items (to paint the picture). I have also received copies of utility payments and have used industry standards to estimate things like the vacancy factor. I will not consider everything to be fully verified until I am ready to conclude my due diligence.

I never fall in love with a property, but I do debate the merits of one that I believe to be worth while. It's OK for you to disagree. Again, I really appreciate your opinion/thoughts, some of which I've found to be helpful. You clearly feel very passionate about protecting your persona and accolade filled profile, which I think is great! Keep up the good work. See you in the trenches!




To post a reply or start a new discussion, create a free account or login.

Manage Keyword Alerts

View All Forums