Check My Numbers: 16-Unit Construction on Gulf Coast of Houston

Developer · Houston, TX · Member since 2018 · 13 posts · 3 votes

Am I missing something?

Commercial Property Valuation = NOI (Net Operating Income)/ Cap Rate (5.5%)

$7,291,636=401040/0.055

If I could acquire this brand new construction for less than $3 Million, is it worth it? and is it really worth 7.3 Million?

16 Units @ $3000 Per Unit = $48,000/month

-$3000 Insurance

-$3000 Property Taxes

-$400 Landscaping

-$500 Dumpster Service

-$4800 Property Management Fee

-$1440 3% Vacancy

-$1440 3% Capital Expenditures

($14,580 Total Expenses)

=$33,420 Per Month or $401,040 Per Year

I'm a builder in the Houston market and could potentially have this opportunity. Any comments, questions, or banter is much appreciated.

Thanks,

Joseph

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Brad Hayden

Real Estate Consultant · Broomfield, CO · Member since 2015 · 79 posts · 40 votes

@Joe Fairley

Joseph, I have a few questions/clarifications:

What type of property/units
Who are the tenants & how are the leases structured
I don't see utilities in the expenses -- are they paid by tenants
I see landscaping & dumpster, but what about other maintenance and repairs
Where did tax & insurance numbers come from -- they seem very low
If its new construction, what is the capex expense, or is this replacement reserves

Thx
Brad

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Bjorn AhlbladPro Member
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
4y
It seems to me the numbers work at 3 million and it is worth it. The 7 million number is completely out of whack and somebody needs a spanking!
0 Reply
Brad Hayden
Real Estate Consultant · Broomfield, CO · Member since 2015 · 79 posts · 40 votes
4y
@Joe Fairley
Joseph, I have a few questions/clarifications:
What type of property/units
Who are the tenants & how are the leases structured
I don't see utilities in the expenses -- are they paid by tenants
I see landscaping & dumpster, but what about other maintenance and repairs
Where did tax & insurance numbers come from -- they seem very low
If its new construction, what is the capex expense, or is this replacement reserves
Thx
Brad
1 Reply
Joe Fairley
OP
Developer · Houston, TX · Member since 2018 · 13 posts · 3 votes
4y
Quote from @Brad Hayden:

@Joe Fairley
Joseph, I have a few questions/clarifications:
What type of property/units
Who are the tenants & how are the leases structured
I don't see utilities in the expenses -- are they paid by tenants
I see landscaping & dumpster, but what about other maintenance and repairs
Where did tax & insurance numbers come from -- they seem very low
If its new construction, what is the capex expense, or is this replacement reserves
Thx
Brad
Brad, thank you for taking the time to respond. The tenants would be on an annual lease. The property consists of 2/2s and 3/2s. The building is new I didn't even think about maintenance and repairs. I suppose I should set aside 5% for maintenance and repairs in addition to the 3% for CapEx. I checked with the county and local muni about tax rates and the tax rates are about +/- 20%, 36K per year. I then compared those against similar properties in the area. The rebuild value would be under $4 Million and based on a 1% rate, the insurance could be up to $40,000.
Recalculating with 5% maintenance, the top tax rate, and a 1% insurance rate....
$6,564,436 = 361044/0.055

16 Units @ $3000 Per Unit = $48,000/month

-$3333 Insurance/month (40k per year)

-$3600 Property Taxes/month

-$400 Landscaping

-$500 Dumpster Service

-$4800 Property Management Fee

-$1440 3% Vacancy

-$1440 3% Capital Expenditures
-$2400 5% Maintenance

($17,913 Total Expenses)

=$30,087 Per Month or $361,044 Per Year
Is there anything else I'm missing or overlooking?
0 Reply
Brad Hayden
Real Estate Consultant · Broomfield, CO · Member since 2015 · 79 posts · 40 votes
4y
@Joe Fairley
I'm still missing some details.
Is this a fully occupied property or newly built in lease-up or a planned development? Those are 3 completely different scenarios.
What is the current occupancy and what are the current actual revenue and expenses?
Where did the $3000/month come from and why would 2/2 and 3/2 rent for the same amount?
Why would someone sell a property at 50% value -- especially in today's market?
0 Reply
Mike Smith
Boise, ID · Member since 2018 · 203 posts · 188 votes
4y
@Joe Fairley I feel a 3% vacancy rate is very low because it must capture physical vacancy, financial vacancy and loss to lease. The entire multifamily industry averages about 58% annual turnover on leases. Let's call it 50% annual turnover. So you will turn 8 of the 16 units every year. If each turnover costs you 2 weeks, that's 16 weeks of physical vacancy out of 832 weeks (16 units @ 52 weeks). That gets you to 2% physical vacancy on an absolute best case scenario. I think 5% is about a minimum vacancy factor and should only be used with near 100% occupancy rates in your market area. I'm seeing closer to 7-8% in most underwriting.

I agree with @Brad Hayden. If new multifamily is trading around 5.5% (seems reasonable to me in Houston) why would a seller accept an 11%+ cap rate? You can check LoopNet to see what current listings are for multifamily in Houston. Something doesn't seem right at all with the sales price vs your projections...

1 Reply
Alex Hunt
Lender · Member since 2022 · 441 posts · 134 votes
4y
From a lender stand point this property would have a DSCR calculation of 2.34 (very High) on a $3million value with the numbers you provided. It would pass the requirement of 1.15 for DSCR all the way up to a value of $7.625 million and a loan amount of $6.1 million. Hope this was helped in some way
0 Reply
John Vo
Investor · Houston, TX · Member since 2015 · 99 posts · 56 votes
4y
@Joe Fairley
$3000/month for a 3/2 or 2/2 multifamily unit seems like it's on the very high end for Galveston. I would definitely re-check the rent comps for Galveston before you commit since your deal is dependent on your rent projection.
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Joe Fairley
OP
Developer · Houston, TX · Member since 2018 · 13 posts · 3 votes
4y
@Brad Hayden Thanks for spending more time looking at this potential deal. This property is my next development on the gulf coast, and therefore it is not built/or occupied. The monthly rent is an average of surrounding market data I have found from listings and rentometer. The land is no longer for sale. I am questioning the value because this is my first effort in Multifamily. I have observed that this is an underserved market, and there is a housing shortage across all classes. Suppose I can build these 16 units for 2.4 Million at around 150K per unit. Again that is builder cost, not client cost. Is this still a good idea?

@Mike Smith Thank you for your input. I'm trying to develop my most conservative figures, and I'll adjust my value to reflect an 8% vacancy. Thank you for your information. The Sales price vs. projections is reasonable because I am the builder.

@Alex HuntThanks for your time. I don't understand DSCR calculations yet. From what you are saying, this sounds like a good deal. I would love to spend some time studying what these numbers imply.

@John Vo , The area of Galveston County I am looking at has about 30% higher rents than the island. This property is not in Galveston City.
All input is appreciated. I'll revise my numbers with higher vacancies and posts. Please keep critiquing.
Thanks again,
Joseph

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Joe Fairley
OP
Developer · Houston, TX · Member since 2018 · 13 posts · 3 votes
4y
Recalculating with 8% vacancy and an average rent of $500 less per unit with all other percentage numbers remaining same. This is how it turned out.
Is it worth investing $3 Million in this property?
Thanks all for helping me.

$4,299,709 = 236484/0.055

16 Units @ $2500 Per Unit = $40,000/month

-$3333 Insurance/month (40k per year)

-$3600 Property Taxes/month

-$400 Landscaping

-$500 Dumpster Service

-$4800 Property Management Fee (based on rents of 3k per unit)

-$3820 8% Vacancy (based on rents of 3k per unit)

-$1440 3% (based on rents of 3k per unit) Capital Expenditures

-$2400 5% Maintenance (based on rents of 3k per unit)

($20,293 Total Expenses)

=$19,707 Per Month or $236,484 Per Year

0 Reply
John Vo
Investor · Houston, TX · Member since 2015 · 99 posts · 56 votes
4y
@Joe Fairley
I'm not too sure how rentometer or other 3rd party source calculate a location's potential rent since I use the free version for research comparison study. One thing I did notice, was that for rentometer, it did not break down the potential rent of a location by single family, multifamily, condo, etc... at least in the free version.
I'm sure you know that particular submarket much better than me, but I would encourage you to do a more in depth potential rent study, if you haven't already, since rent projection impact your deal analysis much more that any other factor.
Source - I am a real estate broker with HAR.
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Brad Hayden
Real Estate Consultant · Broomfield, CO · Member since 2015 · 79 posts · 40 votes
4y
@Joe Fairley
New development brings up a whole new set of questions:
What will these units look like -- size, construction, building layout, floorplans, amenities, etc
- will they be competitive in this market
- will they command these rents

$2.4MM builder cost
- seems low given the recent material price increases & the desire for higher rents
- does this include land cost, due diligence, zoning, planning and permitting, architectural fees, horizontal improvements, vertical construction, financing costs, title & closing costs, carrying costs, lease-up costs, etc?
Capital requirements -- you will need at least 25-30% of the total project cost
Competition -- are there any other developments in progress that will change the supply & demand before you get this finished
It might be worth $4MM when stabilized, but whether or not it's a good deal will depend on what it takes to get there.
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Mike Smith
Boise, ID · Member since 2018 · 203 posts · 188 votes
4y
@Joe Fairley Thanks for the reply. For some reason I missed the part where you were doing the construction without any mark up. I think it's reasonable to get a 10%+ cap rate if you do the development and vertical construction without any markup. Based on your numbers, it looks like a great project to me. I'm looking into doing something very similar so I'd be interested in trading some information with you at some point.
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