MF Deal Analysis Help: 32 Units in Cobb County, GA - Would you do this deal?

17 Replies

Dear BP Community and MF Guru @Joel Owens 

I need some guidance from our experts on analyzing the deal below.

By the Numbers:

A.Property Information:

  • a.# of Units - 32

B.Rent Revenue Assumptions:

  • a.Monthly: $15,200 (Avg Rent 475 *32) equates to 182,400
  • b.Vacancy: 20% equates to 36,480
  • c.Rent Inflation: 1%

C.Property Acquisition Assumptions:

  • a.Price: $640,000
  • b.Closing Cost: 2%
  • c.Deferred Maintenance: $30,000

D.Operating Expense Assumptions:

  • a.Property Taxes/year: $10,000
  • b.Insurance/year: $7500
  • c.Utilities/year: 15,000
  • d.Property Management Rate: 10% - equates to $14,592
  • e.Repair Rate: 8% - equates to $11,674
  • f.Maintenance: 8% - equates to $11,674
  • g.Inflation(annual): 2.5%

E. Finance Strategy

  • a. Down payment: 20%
  • b. Interest Rate:  6%
  • c. Term: 15 years 

In Summary:

Effective Gross Income - $145,920

Total Opex - $70,439

NOI - $75,481

Net Cash Flow after Debt Service - $23,634

Questions:

  • 1)We want to know from our BP Community and Experienced MF investors about the overall deal? Would you do this deal?
  • 2) In your MF experience are the expenses under OPEX assumptions conservative?
  • 3) What additional expenses should we consider?

As always thanks for your input and guidance. Much appreciated. 

@Matt Wood  @Mike O'Connor  

looks great on paper ,but what kind of area is it, if class D area then it is not worth it with the headache that comes with the tenants

@Essam Elkady  thanks for your prompt  response. It is Class C. Is it too much hassle even with good property management in place in your experience. 

Thanks

Hi Azeez,

It is difficult to say whether any experienced investor would do this deal without looking at this property.

Some of the things to consider and wonder are:

- It is a good idea to have 2 br units in any deal which gives an opportunity for a family to move in

- Vacancy of 20 % seems fairly high unless the building/area is going through transformation.  I normally dont touch more than 10-12 % vacancy unless I m renovating

- Is it a C or C - neighborhood?

- Having deferred maintenance of 5 % of the sale price is decent.

- Also what about rents being below market? It is a good idea to get a property whose rents are not at market. You want to maximize your cashflow and there are several ways to do it.

Hope this helps.

Vish

@Vish Iyer  Thanks for taking time to respond to the post. When you physically look at a MF property what attributes do you look for? Construction grade, copper wires, HVAC, plumbing, water meters, location, electric/gas, others..any guidance would be greatly appreciated as I want to get a sense of what physical attributes do experienced investors consider. 

Vacancy 20% - Is very conservative estimate. We are expecting vacancy to be in the 10% range.

The neighborhood is C

We know the rents are below market and there is potential for rent increase in small increments. 

My definition to class C area is ,is area that can be old but still safe ,I mean can you sleep overnight there and walk and park your car without any trouble then it is C area,
This return in C area is amazing

There aren't too many areas of Cobb that are worse than C, so I can buy that.  And for most of Cobb, I would consider the numbers to be very good.  Can you say what part of town this is in (just curious)?

One thing to consider is the mix of units.  How many 1-br vs. 2-br vs. 3br units?

Do you expect vacancy to remain at 20%?  Why?

Numbers look good, but I would suggest to check on utility cost and who is responsible for it? For 32 units this can grow big and effect adversely. Also what is the unit mix 1BR vs 2BR, I prefer a mix over just all 1BR. I would also look into unit turnovers, if that is high then that can increase your maintenance and rent readiness cost for the complex.

@J Scott thanks for the insight it is much appreciated. In regards to your questions below are my responses

1. It's located in 3008 zipcode in close proximty by Dobbins Airforce Base

2. All units are 2 Beds and 1 Bath

3. We don't expect the vacancy to remain at 20% by any means. Our numbers were conservative. We expect the vacancy to be more around 8-10%

@Himanshu Jain  appreciate you taking the time to respond to the post. During DD we will be looking at the utility cost. The unit mix is mainly 2 Bed and 1 Bath units. It seems the rent rolls suggest that tenants turnover is not high at the very least based on what we see at this point in time. However, we will make sure there are sufficient reserve funds for maintenance. Thanks again

@Essam Elkady  Thanks again for your input and definition of class C.

@Azeez 

Some of the things to look for (normally an experienced inspector and contractor would do this for you in your due diligence period).

- Do a drive by in the night and also during weekends, if you have a bunch of people hanging out in a corner, normally that is not a good sign

- Ask for actual rent rolls and two years tax returns

- Also individual meters are great

- Avoid flat roofs if possible

You can check on the physical condition but there are professionals who do this plus the bank would send their people anyway.

Overall the deal definitely looks interesting.

@Vish Iyer  thanks again for providing additional insight. You bring up great points.  One of the challenges I see with this property is that it has  a master water  meter i.e. Owner pays for water. Ideally, having separate water meters would be great since that is one of the biggest variable costs. The cost to get a separate water meter here in the Atlanta area are around  ~2000/ per meter (ball  park) from what I am being told. 

Ideally, I would look for a sub meter company that can  read the  water usage for  each apartment and bill the tenants directly. However, I have not been able to find a company here in Atlanta. @Atlanta people reading this thread if you know of a sub metering company here in Atlanta please let me know.

Good points though.. Thanks again will certainly be cruisin down the streets  at all hours over the next couple days. 

Thanks

@Azeez K., I am curious as to why you want to finance it at 6% for 15 years? Try to get 5% or less 5/30 or 10/30 years loan. You'll get much better cashflow.

@Nick B.  We will be doing a 30 year Term at 4.5-5%ish. That was a conservative estimate to test the deal. We will certainly be targeting a lower rate and a 30 year term to maximize cash flow. 

Thanks again for taking the time to respond to the post.

Azeez, I'd be very wary of this. I'm not crazy about the Dobbins AFB location. I'd like to see a lower purchase price, about $15k per door would be enough. You don't realize how much hard work these things can be until you're right in the middle of it. So look at it this way; what's your time worth?

Best of luck with it!

@Azeez K.  I think the price is attractive -- even alarmingly low.  Haven't heard of rents being that low up there.  Could you attract Kennesaw students to this property?

I imagine rents/condition will move in lock step in this area.  Maintenance and deferred maintenance sound like areas to look at more closely.

@David T.  thanks for taking the time to comment on the post. You bring up some good points. Honestly, I am not as familiar with this area... so I am closely analyzing the deal. Have a 30 day due diligence period hopefully will do additional research before I sign the dotted line.

@Rick Baggenstoss  Long time no see..hope all is well. This property has its own story will have to tell you over drinks. I don't think it would attract Kennesaw students but I would not doubt it.  We are planning on 40k in deferred maintenance included in price. Plus additional 30k as reserves.

Hope all is well

I was on vacation recently so just seeing this.

I don't buy Class C stuff in most cases. I have been there before and it sucks up all your time even with a property manager. 32 doors is not enough to have a full time repair person.

Don't buy the "rents can be increased BS" from the seller. Maybe you can increase rents but not certainly all at the same time or you will get a mass exodus and falling of the occupancy levels. If the rents have been below market for awhile to decrease turnover then it is highly likely it will be very expensive  ( more than your 1,000 a door ) cost to get rent ready again especially if you are asking closer to market rents.

Now if the property is sitting on a nice chunk of land close to a high growth area of Cobb county then potentially you hold the headache for a few years until you can cash out the land for redevelopment at a higher value. Some of these properties were built really low density per acre back in the day. Even if sitting on a small piece of land maybe vertical can go higher and increase the number of units.

As a cash only play these low income units tend to have very little rent increase because the tenants live hand to mouth with almost no discretionary income. Any tiny blip to their income makes their lives fall apart.

So I don't like these properties for a cash only component. There has to be multiple angles for exit to get comfortable with a Class C property along with buying for a low price.   

Azeez,

Newbie investor here... just curious, did this opportunity become Cambridge Woods Apartments? If so, were you able to decrease vacancy? How close were your Opex estimates? 3 year ROI?

I'm new to the ATL, a former math teacher, eager to learn and contribute to the local BP community... advice here on BP is amazing, any suggestions on how to best  get involved locally?

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