Plausible deal in Toledo, Ohio?

Question

Good morning, the following property is up for sale at $250k.

https://www.zillow.com/homedetails/114-S-Broadway-St-Toledo-... seller has 'described' it as follows:

"The property features a new roof and updated electrical work completed two years ago at a cost of $120,000. It currently has 14 out of 17 units occupied, generating a monthly income of $6,300. Once the remaining 3 units are occupied, the projected monthly gross income will be about $7,800. Insurance on the property costs $437 per month. While the property needs some work, none of it is crucial. The roof is new, and the foundation is in good condition. An estimated full renovation of the apartments would cost around $150,000. The ARV of the property is approximately $450,000."

What do you all think? Do these numbers sound plausible?

I'd like to consider this deal and would very much appreciate any input!

Thank you.

Isadore Nelson · Answer

*Toledo, Iowa.

Michael Norris · Answer

Interest rates and insurance premiums are breaking some deals.

For your cash flow estimates you should double or triple your estimate for insurance and see if the deal still works for you. (On that type of deal it should but play it safe)Even if the seller can show you a current policy and that is what they are paying now you as the new owner may not be able to secure that same rate even from the same insurance carrier. The insurance market is very tight right now especially on older buildings.

Many carriers who have policies on the books will not accept those same properties as "new business" or if they do the rates are 2x-10x what the current policy premium is.

The best way to verify that is call the current agent for the policy and ask them what happens when you buy it - will the carrier still offer a policy? if so what do they think the rate change will be? Can you buy the LLC and assume the policy?

I see buyers getting surprised by this often when buying older buildings.

The more time you give an agent to quote the better the chances of getting a competitive rate - a lot of buyers start calling agents when they are going to close and want it NOW NOW NOW> you will pay more this way.

Give the insurance agent a week or two to shop the rate and get the agent accurate documentation proving the age of updates to the roof, electrical, plumbing, hvac, etc and good photos of the property to allow them to sell the property to underwriting.

A lot of people don't realize two sales are made for an insurance policy - one to underwriting and one to the person buying the policy. Right now in this market the first sale (underwriting) can be a LOT harder to make on older buildings than the second one (to you the buyer) lol.

Tyler Rasmussen · Answer

With a property like this, you're probably going to have a lot of turns, and few long term tenants. I'd ask for historical vacancy reports. I'd also recommend getting your own quote for insurance. Multifamily insurance is getting more and more expensive in Iowa. Toledo only has a population of 2400. We've had success managing properties in smaller towns and keeping the occupancy high, but it's something to be aware of.

Sam Applegate · Answer

I want to start off by saying I don't know anything about Toledo. Below are some general comments:

From a high level, if a building is built in 1901, its hard to believe nothing needs to be done.

Second, if the seller just spent $120k, why did it only sell for $120k?

I'd want to understand the vacancy a little more as well. Have they been sitting empty for a while? If they are so easy to rent, then why are they vacant.

If we look at it strictly on a numbers perspective and we assume everything you said was correct, we'd have $93,600 of stabilized revenue. Let's assume a 50% expense ratio which puts your NOI at $46,800. That would make your cap rate 39%. Which is unheard of high.