Potential Large Multifamily Deal

14 Replies

Hello All,

I am looking for any input you're willing to give regarding this deal.  

** Seller is asking 2.5M for 66 units, as-is of course.  He says he is selling because he has an opportunity elsewhere right now.

I've been told the cap rate for our local area is 6%. Rents after renovation are conservatively $550/month on average, $625 on the high end. This complex is the only thing bringing this area down. It's located in the city with the most desirable school systems in our area.

48 Unit Apartments

  • All 2 bed, 1.5 baths.  More than half of the units are vacant, bad tenants being evicted.
  • June’s gross income was approx. $15k.  This will decrease as tenants are being evicted.
  • Only 2 Units are close to being completely renovated.
  • Most appliances were beyond repair.  All units will have dishwashers.
  • Annual Taxes and Insurance currently $17040
  • Roof:was told it was approx. 6-7 years old. No documentation.
  • All new windows and HVAC units purchase and being stored within the two 6000 SF basements.
  • All HVAC units already installed except 12
  • Has on-site laborer for window inst.: $38 per window to remove and replace.
  • Office and Laundry have been renovated.Owner pays approx. $500 per month for utilities.
  • Guys working for him at the moment would like to stay.
  • Cabinet guy makes $15/hr.  Would make an excellent maintenance man.
  • 5 or 6 sets of cabinets ready for installation now.
  • 3-4 laborers making $8-10 per hour
  • 8-10 units have been completely re-plumbed
  • Current owner has probably spent about $400k so far ($5-6k on landscaping)
  • All units are about 850 SF
  • Renovation Estimate: $11,000 per unit (46 units) + 20% contingency fund = $607,200
  • Tenants pay all utilities.
  • Includes Pool

Townhouses (18)

  • Only 4 vacant units.
  • Roofs are all in decent shape.
  • None of them should have to be gutted. They are in decent shape.
  • Maybe sell them with owner financing one by one.

Any advice is very much appreciated.  Would you chase this deal at all?

Thanks,

- Michael!    

At 550 per rent unit average and taking away 50% annual operating costs I get about a 3,100,000 valuation at a 7 cap for resale.

2,500,000 purchase + 607,000 reno costs = 3,107,000 value

So basically you would have zero equity after stabilizing and when you sell with resale costs you would be likely taking a loss.

With 3,100,000 in you are at about 47,000 cost per door for 550 rent so just above the 1% rent to purchase price guide.

Unless the land is very valuable for redevelopment it seems like a ton of work for very little if any return. Sounds like the current owner paid XX for the property and found out it was a money pit with repairs. Now wants to try to sell off the "potential" to someone else and get out of it.

Would be a pass for me. 550 rent per month units tend to be "high touch" to manage and make the income stream go.   

Originally posted by @Joel Owens :

At 550 per rent unit average and taking away 50% annual operating costs I get about a 3,100,000 valuation at a 7 cap for resale.

2,500,000 purchase + 607,000 reno costs = 3,107,000 value

So basically you would have zero equity after stabilizing and when you sell with resale costs you would be likely taking a loss.

With 3,100,000 in you are at about 47,000 cost per door for 550 rent so just above the 1% rent to purchase price guide.

Unless the land is very valuable for redevelopment it seems like a ton of work for very little if any return. Sounds like the current owner paid XX for the property and found out it was a money pit with repairs. Now wants to try to sell off the "potential" to someone else and get out of it.

Would be a pass for me. 550 rent per month units tend to be "high touch" to manage and make the income stream go.   

The OP said the market cap rate was 6% so going in they have over $500,000 upside equity. Of course all the numbers here are pure speculation. There really isn't a VALID NOI calculation or a verifiable cap rate comp. But based on made up numbers you'd be $517,000 ahead.

Promotion
Speed To Lead
Buy hot seller leads w/o subscription
Buy daily seller leads that are actually ready to sell
Finally there's a place where you can buy leads that asked for urgent help selling their house
Sign up for free

That's a big IF based on what the seller is telling them.

I wouldn't turn around a 66 unit for that potential. I would rather build a single tenant STNL all in at a 9 to 9.5 cap rate to cost and sell it at a 6 cap and make close to the same spread.

Turning multifamily around sounds easy but it is a massive undertaking so the upside has to be really large to make it worthwhile.

Cap rates could change between the time he purchases the building and the time it could be re-leased up possibly evaporating his equity upside potential. If he can sit on the property for a long time to make the cycle come back that is different. If he has investors he answers to and a time horizon where he must exit the property then the deal appears to look thin.

Asking $2.5MM for a property that has low occupancy and needs $11,000 of rehab per door seems a bit out of the ballpark. Are the townhouses also in need of rehab? They are asking $37,000 per door plus $11,000 in rehab =$48,000 per door total cost. If that fits into the range you can work with than this may be a good deal for you.

I would consider chasing this property only if the owners will accept your Maximum Allowable Offer (MAO) since the property is over 40% vacant. Have you already done that calculation? Have you calculated ARV? Let me know if you need these formulas.

Originally posted by @Joel Owens :

 . I would rather build a single tenant STNL all in at a 9 to 9.5 cap rate to cost and sell it at a 6 cap and make close to the same spread.

Cap rates could change between the time he purchases the building and the time it could be re-leased up possibly evaporating his equity upside potential.

Cap rates could change also in your preferred investment choice above. You buy in the market you are in. My point was that we don't even have a sales or market price and any NOI or cap rate numbers being used to determine the valuation are a bunch of made up numbers. But where you used the made up numbers and stated that he would have no equity going in I used those same made up numbers to point out a $500,000+ equity upside. Good investment, bad investment?

Thank you all very much for the replies! For a quick calculation, I used the 50% rule for NOI and 6% CAP rate to get an ARV of 3.63M (although, I've heard @Ben Leybovich recommend 60% for expenses, so 40% for NOI instead of 50%).  

I think the seller is obviously asking too much and I would never offer $2.5M.  I was thinking more along the lines of 1.8 or 2.2 M, depending on many different factors of course.

I have not come up with a MAO yet, but will hopefully be getting some help from a local that I met on Bigger Pockets! @Danielle Fattizzi, I know the vacancy would of course affect the MAO, but is there a common method utilized?

Keep the questions and comments coming, please!  

When you have such low occupancy you can only use what little information you are given to come up with an "as accurate as possible" pro forma NOI. Obviously we always want to work with ACTUALS rather than pro forma but this is one of those circumstances in which you really have to do your best with what you have. I think you have been conservative in calculating expenses and in turn the NOI (always a good idea when working off of pro forma numbers).

Yes, there is a common method used for MAO! You have already calculated ARV which is half of the equation. ARV = pro forma NOI/market cap.

MAO = (70% * ARV) - rehab

Let me know if you have questions and good luck!

@Michael Logan - The property is only 60% occupied?  That's all you need to know= run as fast as you can in the opposite direction.  Don't waste your time on anything unless it's stabilized and at least 80% occupied.  Just my 3 cents...

@Michael Logan What is your previous experience? That may help others feel more confident in the deal via you, and my .02 is that you would be overpaying by a long shot right now.

Have you seen some actual comps verifying that you would be trading at market for something with that much delinquency?

Paying full asking price would definitely be too much.  I was thinking in the beginning that maybe around two million would be worth it. But, I have since met with a local investor and he was thinking more along the lines of 1.5 million.  The seller is not interested in either of those offers.

If it meets your strategy, goals and hurdle metrics for further analysis, I'd recommend getting more precision on the market cap, rents and expenses.

Market Cap - A 6 cap for a $550-625/mo property in tertiary AL sounds low.  Brokers can provide market cap ranges and comps (and you can get a little market intel through listings, but use professional skepticism there).

Market Rent - $550-625 is a decent size rent range and more precision would be helpful here as well. Every $25/mo = $330k in value difference (using a 6 cap). There could also be a different tenant class at $550 than at $625...it's in that threshold range.

Expenses - With a renovated property, you can likely estimate expenses with a decent degree of accuracy.

Financing - Distressed asset will require lenders with an appetite for it and a qualified borrower for that type of property.

Management - 66 units may be in that space where full time on-site management and maintenance is cost prohibitive (or not needed but also tough to manage without it).

Good luck and keep us posted.

Promotion
Vacasa
Vacation Rental Property Management
We do the work. You get the ROI.
We do it all for your vacation rental. All—marketing, pricing, guest requests, housekeeping & more.
Free income estimate

@Michael Logan -

Value Add = Being able to increase income and/or decrease expenses correct?

That said... Why do you believe it's an opportunity?

Just because there is a low-occupancy, doesn't = value add.

Keep in mind... that 60% occupancy can drop to 50-55, etc.

Know what I mean?

I know you are probably chompin' at the bit to do a deal... But sometimes, the best deal is the one you walk away from.

I hope I'm wrong about your deal...

Definitely keep us posted!