Real Estate Agent · Atlanta GA & Orlando, FL · Member since 2015 · 214 posts · 101 votes
Good Evening Bigger Pockets Family,
My name is Niyi and compared to many of you i am a new investor. I purchased my first property in December of 2016 via a househack and i now have a 12 unit deal under contract!! Below is the information i have acquired thus far and a link to the bigger pockets analysis that i ran:
All Units are currently being rented to Section 8. I was told this is not a mandate, the current owner just prefers subsidized housing. This is a 3 property deal with each property housing 4 1 bedroom units.
Haha i hear you. I have an inspection scheduled and am awaiting actuals on the utilities before making a move. I believe that if i am successful in flipping this from section 8 to regular housing, there is a great opportunity to make significant income.
Niyi A. Keep doing your due diligence. With everyone’s input your numbers looks much more realistic. It is not easy to get $100/door now a days. So if the area turns in 1-2 years you may get that. Update us after you close and get the repairs and turned the tenets.
Section 8 is going up. When we bought our current duplex it was roughly $300 [$500 lease] below market rent. We increased the rent on one by $275 [with water/yard work] and the other lease is coming due in August and we are asking $910 and includes $60 in water bill. Just because its low now does not mean you cant raise in a few months to a year, make minor improvements and build cash flow. I like section 8 as it gives me requirements to meet and if i do i get rewarded for it. :)
That $700 at first glance is really weak, just CYA!!
This sounds like a great deal for you specifically since you already owe a property in that street, can get some economies of scale, and doing your own PM. Hopefully the seller is a bit motivated and can knock off couple thousand and then you are off to a great add to your portfolio :)
Are you buying these on 3 separate loans? Because a commercial lender isn’t going to do 30 year fixed financing.
Totally Agree. @Niyi, you will get 5-year balloon loan with interest rate higher than 5.5%. I closed on a 9-unit in Birmingham in Dec, 17 and I got 5.5% at 5-year balloon and 25-year amortization.
@Tony Mai Will do! I believe the property is not operating to it's potential. After the feedback received from here i may need to ask for some concessions on price.
I don't know the market in Louisville so I can't comment on the purchase price or return but allow me to give you a thought from an appraisal standpoint.
One bedroom units for MF are the equivalent of 2 bed houses. Both rent higher per foot than a 2 or 3 bed unit or 3 or 4 bed house.
A 1 bed unit is similar to a 2 bed house in terms of functionality & potential pool of tenants. The starter home if you will. As families grow they need more bedrooms. This in turn will do 2 things for you.
1 - give you a single occupant, likely elderly
2 - limit your ability to rent in the event of vacancy.
It is considered functional obsolescence. This is negative/detrimental effect to value.
The sweet spot for MF units is 2 bedroom & 3 bedroom for houses.
Expect issues with the appraised value due to all being 1 bedroom unless the appraiser is a yes man for the bank. If he calls balls & strikes he'll hit it for functional obsolescence because it offers limited utility with no potential value add. Utility is basically what the occupant, owner can do with a property from recreational activities to lot topography to available space with the interior/exterior.
Something to consider prior to investing that amount in something that will always have a ceiling with income & your ability to sell down the road since it will always lag behind the market in terms of appreciation.
I think your expenses are low actually, though I don't know Kentucky.
Vacancy should be at least 8% (most banks will underwrite that way or to the historical rate). Capex is WAY low at 3%, especially with 3 roofs, systems etc. and repairs seem low as well.
Your PM rate may be high at 10% but when you add in turnover, lease commissions etc. it seems likely to be about that. One beds turn over a lot more frequently than two beds and you have refurbish money, etc.
What you wrote makes sense Jason, i will take this into consideration. (sidenote - correction made on the capex, vacancy, and repairs. Capex=10%, vacancy and repairs are now at 5% apiece).
Thank you for catching that! I have adjusted the capex to 10%, i PM myself via buildium currently so my actual PM rate is ~2% - 3% (i put in 10 in case i want to move to property management down the road).
Knock on wood, i haven't had to fight for collections yet. I screen very hard (600+ credit, no evictions, verify employment/previous landlords, etc.). What do you normally budget for legal/collections?
I promised i would give an update on the property in the post. Completed the due diligence period and found that there are a few structural concerns that need to be corrected (water and former termite). I had a company I trust come in and assess the situation and give me a quote on correcting it. I requested concessions from the seller ($20K at closing) and will be moving forward on this property. The link below is to the updated deal, first thing you will notice is that it is -$214.51 per month and -2.34%. See value add opportunities below:
Vacant Unit - One of the 12 units is vacant and needs minimal work. I will complete work and get this rented for at least $650 per month with tenant paying electric/gas.
Utilities - All 12 units are separately metered, but the landlord is paying for gas/electric. This is costing $1,012 per month, i will transfer this responsibility to the tenants as the leases turnover. Reducing that cost to (conservatively) $400 or less.
Turnover - 6 of 12 leases turning over this year (plus 1 vacant unit) i can fix up units with minimal cost and get my own screened tenants in paying for their own gas/electric. The rest of the units turnover mid-way through next year.
Below is what i believe the financials on the property will look by the end of 2019 (conservatively):