Help Me Analyze this 8-Plex
Hello,
I've had my eye on an 8-plex in an area of Alabama that I invest in. It's in the specific town that I focus on but it's in a rough part of that town. The area is known as the drug area of this small town with crack houses down the road and it also has townhomes nearby where a lot of registered sex offender's live. With that said, I think I could turn around the building and find quality tenants. There are a lot of businesses within 15 mins of here that employ a lot of people whose income falls in line with this building. In addition, it's the only multi unit complex in this town which is very attractive to me. Here are the details:
-Been on the market for over a year.
-Seller is very aloof. I've tried to reach him multiple times and I'm able to catch him about one out of every 3 times. He only has 2 tenants currently, citing that he's trying to rehab the property, but from what I've seen he's just a very lazy owner. He lives in California and abroad and his reasoning for selling is that he hasn't been able to find a quality PM and he's too far away for this investment.
-The property has remnants of past water damage throughout. The owner has replaced flooring in a lot of the units but it's a problem bound to happen again soon. I took my GC through the property last month and he estimated $20,000 in repairs, which mainly are to permanently fix the water flood/leak issues. I've been using $30,000 in total repairs as my estimate.
8 units, all 2 bed/1 baths
2 units are currently rented at $625/month
The other 6 units are in the process of being rehabbed, but from what I've seen that's a very slow process
Owner pays trash ($108/month), water ($144/month), landscaping ($150/month)
Monthly Insurance: $400/month
Property Taxes: $3,300/year
I'm using 10% vacancy, 7.5% Repairs, 7.5% Capex and 10% Property Management.
The owner is asking $375,000 and is willing to self finance it with 20% down on a 20 year amortization, and the rate hasn't yet been discussed. I think the complex in it's current shape is worth approximately $325,000 and I think would have an ARV of $350,000.
I'm contemplating offering $300,000 with 20% down, with $240,000 being financed at 5% on a 20 year amortization. If I can increase rents to $650/month here are the numbers I'm seeing:
Pro Forma Cap Rate: 8.39%
Cash on Cash: 9.64%
Monthly Cash Flow: $723
I did my first deal last month in this area that was a fixer upper that I got my first tenant moved in today at a cap rate of 13.28%. It's a mile away from this 8-plex in a slightly better area with what should be higher quality tenants.
Given this information, what would be your offer on this property? I've painted an accurate picture of the area but I'm optimistic that I can find quality tenants even in this area.
Thank you for reading and your insight.
-Shane