New to multi-family apartment. I need some help evaluating a potential multi-family. 24 unit in 1 building apartments in North Carolina. Currently 100% occupied. Looks like shared expenses for electricity, sewer/water and internet/cable. It is right across the street from a university.
Thank you very much in advance!!!
Here are the details. They are asking for $1.4M
2016 Numbers $210k Gross income + 7k Other income = Total income $217K
2016 Utilities - $61k
2016 Maintenance - $10k
2016 Turn costs (seem high but it is located near a University) - $7k
2016 Rental Operating Costs (advertising, court, credit checks, Public Relations??) - $7k
2016 Insurance: $8K
2016 Property Management Fees: $11K
2016 Office Expenses (Phones, answering service, admin, computer cost, software fee ???) - $3k
Then they add some more weird stuff..
2016 Labor expense (Payroll Labor, work comp, employee benefits, etc) $21k
Total Operating Expenses: $129K
2016 Taxes - $27K
Total Expenses: $156K
NOI = $61K
I know you don't add the mortgage but do I include the taxes in the cap rate? So cap rate is 4.35%, right? Low, right?
Seems like at this price point putting 30% down and getting a mortgage for $980k @5% (assumed) gives me a P+I of $5k or $60k annually which barely covers the NOI. Unless we are paying cash or getting a significant reduction in price it doesn't seem worth it right? 2017 rents have gone up about 6% but still not quite seeing the opportunity on this one.
Also it seems those expenses are out of hand, maybe the management company is running their office numbers through the building?
I haven't seen the property but would definitely separately meter the units if we did go through with it.
@Luis Barberi It's hard to tell without more legwork. That could be a good deal or a terrible deal. A few questions.
What does the current rent roll look like? I'm guessing average rents of around $725? Is that right? Are most of the units at that price point? Where are they in relation to other comparable properties in the area?
Is there deferred maintenance/repairs that need done or is the property pretty much turn-key? How old is the building?
Why exactly are the utilities provided? Are they physically able to be separated?
Who owns it and how long have they owned it?
How is the property currently being managed and how do you plan to manage it? 24 units is very awkward because it is too small to have an employee but it sounds like they do.
FWIW the numbers they gave you sound fairly honest and could be a good opportunity with the right plan.
I'd suggest digging in and talking to a lot of other people in the area, particularly property managers and brokers to learn more.
Yes, the taxes are included in your underwriting. How are you coming up with the down payment? Is the money yours that you saved? Are you partnering with investors?
Thanks for your response @Jeff Kehl you had some great questions and I am glad I went back to the broker and asked him some of these things.
Actually it seems the slide they had on the price was incorrect as I was looking at a slide on a loan mockup which said $1.4M the owner is actually is asking for $1.7M. He is a builder and this is his smallest property and wants to get rid of it at a loss. It was built in 2009 pretty much turn key.
Supposedly the reason the utilities are included is because since they focus on students - scholarships, grants etc sometimes don't cover utilities so they have decided to do an all inclusive model. However they had another PM company about 18-20 months ago which was focusing on rent as a per door where as the model should have been per bed as they are students. He mentioned while there were existing contracts in 2016 which were per door rather per bed, 2017 Income should be around $260k expenses around $169k to bring the NOI at $90K which actually increases the cap to 5.29%
As for the expenses from the PM what he said is that the $11k management fees are essentially their profits around 4.4% and then what they do is they will bill you for other services individually. He says it is common in NC Tristate area?
I do think the numbers are honest but I don't see the return as I will probably pay 90K in just the mortgage! Any other thoughts? Maybe its not the right play.
Thanks @Chris Tracy I am open to partnering but I was look at this for myself. I currently own an apartment in Miami which is paid for and was going to either sell it for a 1031 for the DP or use a HELOC. I am currently getting $15K NOI which I manage myself as it is paid off. I don't want to move away from something that cash flow positive into something that is cash flow neutral.
@Luis Barberi You need to calculate the DSCR(Debt Service Coverage Ratio), to determine if the Subject Property will even qualify for Commercial Financing. The vast majority of Commercial Lenders want to see a minimum DSCR of 1.25. Below is an Real World Example of how to calculate the DSCR. The numbers below are of a Multifamily Property I am analyzing, for potential acquisition.
Be sure to use gross potential rents (GPR) and not actual collected rents for rental income minus Vacancy that yields the Effective Gross Income.
1. Determine the total Annual Expenses.
2. Determine the NOI: Annual Expenses - Effective Gross Income = NOI.
3. Determine Debt Servicing: 0.3 x Sales Price = Loan Amount. Use an Interest Rate of 6% and an Amortization Schedule of 25 years.
Sales Price: $750,000
Down Payment: 0.3 x $750,000 = $225,000
Loan Amount: $750,000 - $225,000 = $525,000
Interest Rate: 6%
Amortization Schedule: 25 years
Annual Debt Servicing: $3,382.58 x 12 = $40,590.06
To calculate the debt service coverage ratio, simply divide the Net Operating Income (NOI) by the Annual Debt. DSCR = Net Operating Income / Annual Debt Service. Assume NOI of $61,047.
DSCR = $61,047 / $40,590.06 = 1.50
I hope you find value, in the above information.
Thank you @Thomas Franklin good to know.
Sounds like a tight deal to me. The expenses are high, so that is something you may be able to trim down. I own plenty of student housing and charge all my residents utilities. That is in Minnesota, so NC may be different.
Thanks @Todd Dexheimer do you charge per door or per bed? Any advice on the subject?
I charge per unit. I base the calculations on a per door
Luis, if you are renting to students finding out the per "bed" fee might be worthwhile, but make sure you do this with real comps in the area of course. Sometimes you can squeeze and extra this way since $475.00 per bed for a 3 bedroom sounds way better than $1425.00. Really how you market this is the key to making it successful.
Another way around the utilities is to incorporate a "RUBS" program that basically takes the utilities and really anything you want to include (trash for example) in a percentage base system billed back to the residents each month either run in house or through software/third party. I am seeing this more and more and since many larger MF properties are not metered individually in my market, is the only cost effective way to go.
The nice part about student housing if your in a good market by a nice college you are basically partnering up with the parents so payments are easier to collect (usually online) and if damages occur they are also very easy to collect since parents that send kids to a good college usually have their finances in order and care about their credit.
Thanks @Michael Tempel I will keep that in mind.