I am currently evaluating a transaction to purchase 14 brick duplexes in a package deal for $1.6 MM. Eight of the 28 total units are 2 BR/1 1/2 BA and the remainder are 3 BR/1 1/2 BA, with rents ranging from $650 - $800 per month (gross rental income at 100% occupancy is $19k per month). The properties were developed by the owner approximately 12 years ago and have been well maintained. At an assessed value of $1.85 MM, the properties are paying about $38.5k in annual property taxes. Please advise as to whether you think this is a deal worthy of evaluating further. If so, any guidance or insight you can provide into how I should be approaching the due diligence and evaluation of the deal would be greatly appreciated. What questions and information should I ask for? What assumptions should I use in underwriting the economics? If the seller is open to creative financing, what are some possibilities I might consider proposing? If you have questions or need more info to accurately assess the situation and share your perspective, please feel free to ask. Many thanks!
This deal passes my 1% rule so I would look further into it.
A couple things to consider:
Your inspection is going to cost a fortune, but you must do it. The appraisal may run you quite a bit as well.
I would then run the standard battery of deal analysis against it. I use
Sewer and Water
Cap Ex and Ops (this is the scary one on this deal. You have 14x the number of problems that a conventional duplex does. Remember that in 20 years you are going to have to do 28 water heaters, 14 roofs and 14 HVAC/heating unit. Budget accordingly. I would look at this as 14 separate duplexes. I budget $150/month/roof. )
Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)
Vacancy- as a %. (8% represents 1 vacant month/unit/year)
Thanks for the thoughtful response, Aaron. I have generally been subtracting 50% from Gross Rents immediately to ensure adequate coverage for operating expenses and reserves. After accounting for these items, I evaluate whether that provides sufficient coverage for P&I and some form of cash flow (even if modest), which I would use to further enhance reserves or make additional principal payments, etc. I earn sufficient income through my "day job," so I am approaching these investments as a long-term wealth building strategy. I don't have equity in my company, so it's important for me to capitalize on my current earnings capacity by making investments that create a liquidity event of some sort or provide a substantial stream of cash flow in the future. I like to think I have good business sense and generally use sound judgment when approaching transactions, but I am new to the game and trying to learn all I can to ensure I am properly evaluating deals and taking advantage of the many ways to structure and finance them. Any and all insight is appreciated.
Im going to second what @Aaron Montague said, the quick math suggests this deal is worth looking into. But if I was in a position to take down a 1.6MM deal I would be looking at apartments buildings rather than 14 duplexes. 48 apartments will be easier to manage that 28 duplex addresses.
Anyhow back to your duplexes, if you can get us the cost for the expenses that Aaron listed I can run this deal thru my spreadsheet in 5 mins and give you a pretty good idea of the performance of this deal.
Todd do you have any experience as a LL/PM in the past?
Thanks, Chris. I am interested in apartment complexes, but haven't been able to find anything that is suitable in my area. They are either in bad locations, have significant deferred maintenance, or are overpriced and I can't seem to make the numbers work. Additionally, my thinking relative to this particular set of duplexes is that they are all clustered together in the same cul-da-sac, which functions more like an apartment complex, yet you have the flexibility at some point to sell them individually, a few at a time, or as a package deal. It is also easier for buyers to get financing on a single family (1-4 unit) than it is on an apartment building, so I thought that would increase my audience when planning my exit strategy. I'm trying to get a full set of numbers (operating expenses) from the seller and might take you up on your offer once in hand.
I do not have any previous direct landlord/property management experience, but also don't intend to manage the properties myself.
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