Am I getting my small MF costs right?

28 Replies

Hi All. I'm looking at a couple multifamily properties in Northern Michigan (local to me). They don't seem like good buys, but I'm concerned that I may just have my expense numbers wrong. Below is one of them. Am I missing anything, or including something I shouldn't? Or including things in NOI that I shouldn't? I have one rental, but this would be my first multifamily

I'm doing a lot of numbers on these as practice, and plan on touring it next week. Even if nothing comes of it, it is a good learning experience!

6 total units (3 duplexes, Four 2-bedrooms and Two 1-bedrooms)

Asking Price 196k (Has been on the market for 14 months. I think they got the price by adding the potential retail price of each duplex, not calculating NOI against CAP Rates for the area (8-9%))

Current Gross Rents: $2,525, I think this could be stabilized to about $3,100.

Thanks!

Monthly Expenses
Cost Item Cost Estimate or Actual?
Included in NOI
Prop Taxes $500 Actual, seems high, maybe could be lowered
Insurance $238 Actual, number from Ins. Agent for Replacement cost, could insure at ACV
Water/Sewer $170 Actual, a couple residents have Washers, would charge them for this.
Trash $19 Actual
Electric $0 Estimate, Tenants pay
Gas (for Heat) $0 Estimate, Tenants pay
Landscape / Snow $125 Estimate, large shared parking lot, lots of grass, lots of snow
Accounting / Tax $50 Estimate
Legal $30 Estimate
Vacancy/Loss 10% $253 Estimate, number bank appraiser uses
Repairs & Maintenance 5% $126 Estimate, appears to be very little deferred maintence, would be confirmed
Management 10% $253 Estimate, would self manage, but to put against NOI
Total NOI Costs $1,763
................................................
Not included in NOI
Financing $606 Assuming an offer of 100k, 75% bank financing, 20% seller financing
CAPEX $125 Estimate at $250/door/year, would be confirmed
Total Extra Costs $731
................................................
Total Monthly Expenses $2,495

Howdy @Kurt Hines

Looks like you covered everything . I would increase the CapEx amount to 10% until you can verify the current condition of all major components and appliances. Then adjust from there. Is each Duplex on its own lot or all on one lot? If separate, that might be why they used Comps verses Cap Rate. With a 9 Cap Rate and using your NOI makes it look like they under priced by roughly $50K. What is driving your $100K offer price? Is there a lot of Rehab work needed?

Hi @John Leavelle

The 100k is theoretical. I based that on what the numbers show me the value is as a multifamily purchase. 

As I understand it, the formula is NOI/Cap rate. So ($2525-$1763*12=$9,144) / .09= $101,600

I assumed I had to be wrong, because with the value that low, listing it as a multifamily purchase doesn’t make sense, vs just selling them off individually. 

If you’re saying my cost numbers all make sense, then this as I suspected, is a pretty bad deal. 

@Kurt Hines

No. You are right. I miss read your NOI line. Thought you said NOI was $1,763.

I would not shoot it down as a bad deal yet.  Just using the 1% and 50% rules it’s still worth looking at.  I need some additional information.

Financing:  If purchased as a group (6 units) it is considered a Commercial property and the financing should reflect that.  What are the details of your bank financing at 75% and Seller Financing 20%?  If these are 3 separate properties, but, bundled as a group you can try to find a portfolio lender for better financing.

Is the owner offering Seller financing?  If not why are you putting it in your analysis?

Are they 3 separate properties?

What are comps selling for if they are separate properties? What would be the ARV for each?

What is the breakdown for the rents and projected Market rent rates?

What condition are they in?  Estimate of Rehab costs?  This directly affects your offer price.  I realize you haven’t seen the properties yet.  

Originally posted by @John Leavelle :

@Kurt Hines

Financing:  If purchased as a group (6 units) it is considered a Commercial property and the financing should reflect that.  What are the details of your bank financing at 75% and Seller Financing 20%?  If these are 3 separate properties, but, bundled as a group you can try to find a portfolio lender for better financing.

I looked up the tax records, and it looks like these are listed separately.  So I might be able to get better terms with a portfolio lender. I'll have to confirm that and run the analysis.  For commercial financing I put 75% at 4.5%, 5 year note, 20 year amortization. For seller financing I did the same with 20%, at 5%. I know these figures are rough, and have been taking that into account as I look at the numbers.

Is the owner offering Seller financing?  If not why are you putting it in your analysis?

I haven't talked to the owner yet. I put that in there as a scenario with low cash in, higher monthly cost. Even if I put more cash in, I want to make sure there is enough space in the monthly cash flow to handle issues.  The property has been on the market for 14 months (And is in a Trust, with the previous owner deceased, not sure how that changes things), so I figure the Trust might be interested to get it sold.

Are they 3 separate properties?

I think they might be, based on the tax records. They are all adjacent to each other in a kind of triangle, on a corner.

Their are not a lot of duplexes sold in the area, with prices all over the place, but I would put the ARV around 55-65k for the building with the two 1 bedrooms on the low end, and the two 2-bedrooms on the high end. They are directly next to the railroad tracks, which is going to lower the value.

We don't have much appreciation in this area, and I am primarily interested in cash flow.  I like the idea of buying a smaller local multifamily as a cash flow play, and learning.  This just happens to be on the market now, along with a 7plex with worse numbers (owners pays all utilities), if this doesn't work, I can look for off market deals.

Thanks!

Looks like some questions got dropped.

What is the breakdown for the rents and projected Market rent rates?

Rents for the 1 bedrooms are 335 and 345 (could be raised to at least 450.) Rents for the 2 bedrooms are 435, 460, 475,475. They could be raised to at least 550 each. I need to see the units to get a better idea of exactly what the rents could be. 

What condition are they in?  Estimate of Rehab costs?  This directly affects your offer price.  I realize you haven’t seen the properties yet.  

 They seem to be in good condition overall, and it appears they've been somewhat updated, with 2 of the buildings having new roofs put on in the last few years. I put an estimate of 15k of rehab in to spruce them up, but I don't know for sure until I see the properties.

@Kurt Hines,  I think it is not a question of cap rates on these units if they are individual duplexes on separate properties. But in any event I think that you arrive at the same conclusion. without getting too crazy on the financing, if you put $30k down on a purchase price of $120k, with 5% financing at 25 years, your cash on cash would be about 9% (don't forget about $2k for closing costs and something for repairs - there are always repairs). 

In my opinion, at $196k, the Seller is just fishing for a fool. Using the same financing terms as above, you would be in the red $102/mos.   

With this property I think it is in Seller's best interest to market it on comps rather than Cap Rate.          

@Ken Vance

The seller is selling them as multifamily, but pricing them as if she is selling them retail.  Probably why they have been on the market for so long. But regardless, it has been a very useful exercise in running my numbers. I’d prefer Togo a bit larger anyway, something with units in the teens, and I can use these learnings towards that. 

Regardless, I’m going to keep pursuing this throughout the process, and even put an offer in, if I can do it where the numbers make sense. If for the learning, if nothing else. 

what about trash, landscaping and pest control?

I think you have covered most. Property tax I get $275/month.

The management seems to be high. Landscape seems to very high. Needing pest control.

Alpena$200,000$2,640  yearly  1.32%

If I was opt to buy a multi-family I expect to be in much positive cash flow and reasonable urban appreciation like 4-5% per year.  There is a lot of responsibilities and work. You do not have public lights, laundry room? 

I personally will never invest in anything on a busy street or near a freeway or railroad -just my preference. Your assumption is they will sell it 50 cents on a dollar. Need to talk to your local realtor as they have a better feel. 

Capitalization rate(look it up f you do not know)- I will search anything over >10% I think some mid-west cities are close to 15%.  In CA we still can get 3-5% with 12-20% appreciation every year.  

Are these buildings under the same roof? If not, you may not be able to buy as a multifamily despite how the seller is marketing them, unless you do more of a portfolio loan. As far as the actual numbers, you've done a pretty good analysis, now project what profit you are seeking and make an offer based on that figure. Good luck!  

@Mario Brown I have trash and landscaping/snow in there (though that is the weakest of my estimates.) I don’t have pest control, good catch

@Sam Shueh for Managment I just put in 10%. I’m going to talk to the local property management company to get a firm figure. 

I appreciate the thought about the RR tracks. It’s a concern of mine. 

Cap rates here are 8-9%. I like the idea of getting something local that I can buy, get a good chunk of forever appreciation, which I can tap into for the next deal. Local helps me really learn, and perhaps go farther afield next time.   Local to me means not much appreciation. But if I can lock in good cash flow, I’m okay with that for my first MF deal. 

@John Casmon  they are 3 duplexes all together. I’ve already talked to a commercial lender at a local bank, and he gave no indication that there would be a problem getting a commercial loan on them. Of course I might be better off with residential loans from a portfolio lender. 

@Kurt Hines  lawn and snow seems low especially if you have a large parking lot. 1 or 2 big storms and it can really jack your expenses.  Your repair and maintenance seems low.  If you figure about $400/year per unit (which can be low) you’re looking at $2400/year or $200/mo.  Are they on separate parcels?  I’d rather have a 6 unit than multiple buildings = 6 units.  Easier to maintain.  1 roof instead of 3, 4 exterior sides to maintain instead of 12.... you get the picture.

What company is the insurance quote from?  I would highly recommend an Independent Agent with a good reputation and expertise in landlord properties.

Maybe consider adding economic vacancy.  Not the same as vacancy loss.

@Salvatore Lentini  The lot isn't huge, but the lawn and snow figure would need to be firmed up.

As for Repairs/Maintenance & CAPEX, my plan was to do a through inspection of the property, and figure out what an appropriate CAPEX number and repairs and maintenance number would be. This property appears to be in good shape, hence 5% for R&M to start. What does everyone else use?

These are 3 duplexes, all next to each other.  Under one roof would be better, yes.

@Owen Rosen  The insurance quote is from a local independent agency (Alpena Agency).  I prefer to always work with an independent agent.  I would be doing much more thorough insurance investigation before purchasing coverage.

Great, always strongly recommend an Independent when it comes to investor properties...
Originally posted by @Kurt Hines :

@Owen Rosen  The insurance quote is from a local independent agency (Alpena Agency).  I prefer to always work with an independent agent.  I would be doing much more thorough insurance investigation before purchasing coverage.

@Michael Dang  My understanding of the Vacancy / Loss is money not earned while a unit is not rented, between tenants, or if it is off the market for some time for some reason (Vacancy), and Rent due but not collected (Loss).  When I google Economic vacancy, that appears to basically be the same thing, except it includes things like giving a free month of rent and model units.

Is that what you are talking about, or should I be looking at something else?  Thanks!

@Kurt Hines Just my initial thoughts:

1. Some insurance companies have materially better rates for non-duplexes.  Just make sure the agent who gives you the quote knows what the structures actually entail.  "What's the premium for 6 units?" could yield a very different quote than "What's the premium for 3 duplexes?"

2. How do you plan on lowering the property taxes?  Is it easy to appeal?  

3. How do you actually plan on charging tenants for water?  Or the washers?  Unless the metering is separate and the city is groovy billing unit-by-unit you might not have a choice.  

4. Where I invest I pay for quarterly pest control.  It's more expensive that it seems.  And don't forget the probably annual termite inspection.  $1,500 doesn't go that far when it comes to break-fix, pest control, termite inspections, etc.

5. $420 average rent per unit per month is low.  That doesn't make it a "bad deal" but it will throw a monkey wrench in your percentage-based calculations like maintenance.  You really need to look at cost estimates for what you can and they try to see if your percentage estimates look correct.  I'm guessing the won't.

Thanks for all the points @Andrew Syrios !

My responses

1. Some insurance companies have materially better rates for non-duplexes.  Just make sure the agent who gives you the quote knows what the structures actually entail.  "What's the premium for 6 units?" could yield a very different quote than "What's the premium for 3 duplexes?"

This is really good to know.  I will look into it. Thank you!

2. How do you plan on lowering the property taxes?  Is it easy to appeal?  

I wouldn't plan on definitely being able to lower them, but they just seem really high for the area. You can file property tax appeals, and I would investigate this. But I would do the deal planning on having to pay this bill, and make sure the numbers make sense.

3. How do you actually plan on charging tenants for water?  Or the washers?  Unless the metering is separate and the city is groovy billing unit-by-unit you might not have a choice.  

If viable, I would do a general water cost billed back to the residents (probably some percentage of the actual bill, so I can say they are saving X% on water). I don't know if I could though in this area. But specifically for the units that installed their own washers, there would have to be a separate surcharge for this if I can't bill water usage, as they are using more water than everyone else. I don't know what units have washers yet, but the water bills are are about $900, $700, and $450 for each duplex.  One of the duplexes is 2 one bedrooms, which is probably the $450 bill, but my suspicion is the big difference in the other bills is because of washers. I might have to wait until lease come up, but this would be part of the lease.

4. Where I invest I pay for quarterly pest control.  It's more expensive that it seems.  And don't forget the probably annual termite inspection.  $1,500 doesn't go that far when it comes to break-fix, pest control, termite inspections, etc.

Pest control is not something I've ever considered, as I've never had to hire them for myself personally. But I can see how this could be an issue with rentals. I'll definitely have to research it.

5. $420 average rent per unit per month is low.  That doesn't make it a "bad deal" but it will throw a monkey wrench in your percentage-based calculations like maintenance.  You really need to look at cost estimates for what you can and they try to see if your percentage estimates look correct.  I'm guessing the won't.

 I agree entirely. That is what could make the deal viable, is the difference between what they are charging and market rates.  I'm viewing the units tomorrow with my agent, and I plan on nailing down what I could charge at market rates.  The purchase would need to work to some degree at the current rents, but I am fine waiting until the building is stabilized if I need to to get the cash flow I want.

My plan is to move away from percentage based figures for R&M and CAPEX, and have firm numbers based in the actual buildings.

Hi @Michael Plante .  The rents are well below market rate.  If I bought them, I would do what is needed to fix/spruce them up, and then get to market rents, though not necessarily in 1 year.  I'm okay with longer term plans if necessary.  I've read many stories on biggerpockets of investors doing this same thing, and many tenants happily paying more for a better place to live.  

A lot will be answered when I see the properties tomorrow.

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