Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y
@Todd Keith Does the current owner use a property manager? It's always nice if there's some neutral 3rd party that's telling you OpEx numbers. You also have no clue (at least I'm guessing you don't) if they are doing 100% of the labor themselves and really driving down those maintenance costs. Regardless, the OpEx percentage seems low. You should be able to take a peek at what they pay for insurance, look at the property tax records, and maybe trying to fudge what they are telling you they pay for maintenance, landscaping, property management, etc.
I know this is really obvious but cap-ex for a 26-unit place is where you could get killed. Roofing for 26 units, HVAC issues, resurfacing the shared parking area, etc. are all high dollar items. And for a current owner it's really hard to "get your money back out of it" when you resurface a parking lot. It's not like you could charge more rent and you have to depreciate the expense over time. Not fun stuff. And could be a reason to sell.
The other thing to think about (speaking from experience) is that 1 bedroom/1 bath places are a little bit of a unique animal. It's arguably better to have a mix of 2/1 and 1/1 to appeal to a broader range of renters. Having *only* 1/1 can be limiting. You really have to know the tenant population in the area. The last thing you want to end up being is the "low cost option" in the area.
Real Estate Investor · Dallas, TX · Member since 2011 · 529 posts · 48 votes
8y
@Michael Le - Yeah. That OpEx does seem mighty low. My rule of thumb is usually 45%.
As for why I think it's priced high, I like to find property at $25K per door or less. At $1 million, the price per door is $38K. Aside from that rule of thumb, I shoot for $100/door in cash flow. At $1 million, with financing, this one negative cash flows.
This is what makes me think the price is too high.
If I gave the full asking price, and financed it at 5%, (10% down, 5 year balloon, 30 year amortized), I would be negative cashflowing to the tune of $-14 per month/per unit ($-364).
Underwriting
The seller is willing to finance the deal at 10% down and 8% interest. (I think I can beat that)
I'm looking at private money lenders for financing.
Rental Property Investor · Chicago, IL · Member since 2014 · 108 posts · 49 votes
8y
10.8% cap rate does not immediately strike me as unreasonable without knowing area, comps, building condition, etc. The laundry income seems pretty high but more importantly the expenses seem far too low for class C.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y
@Todd Keith Does the current owner use a property manager? It's always nice if there's some neutral 3rd party that's telling you OpEx numbers. You also have no clue (at least I'm guessing you don't) if they are doing 100% of the labor themselves and really driving down those maintenance costs. Regardless, the OpEx percentage seems low. You should be able to take a peek at what they pay for insurance, look at the property tax records, and maybe trying to fudge what they are telling you they pay for maintenance, landscaping, property management, etc.
I know this is really obvious but cap-ex for a 26-unit place is where you could get killed. Roofing for 26 units, HVAC issues, resurfacing the shared parking area, etc. are all high dollar items. And for a current owner it's really hard to "get your money back out of it" when you resurface a parking lot. It's not like you could charge more rent and you have to depreciate the expense over time. Not fun stuff. And could be a reason to sell.
The other thing to think about (speaking from experience) is that 1 bedroom/1 bath places are a little bit of a unique animal. It's arguably better to have a mix of 2/1 and 1/1 to appeal to a broader range of renters. Having *only* 1/1 can be limiting. You really have to know the tenant population in the area. The last thing you want to end up being is the "low cost option" in the area.
@Michael Le - Yeah. That OpEx does seem mighty low. My rule of thumb is usually 45%.
As for why I think it's priced high, I like to find property at $25K per door or less. At $1 million, the price per door is $38K. Aside from that rule of thumb, I shoot for $100/door in cash flow. At $1 million, with financing, this one negative cash flows.
This is what makes me think the price is too high.
If I gave the full asking price, and financed it at 5%, (10% down, 5 year balloon, 30 year amortized), I would be negative cashflowing to the tune of $-14 per month/per unit ($-364).
Underwriting
The seller is willing to finance the deal at 10% down and 8% interest. (I think I can beat that)
I'm looking at private money lenders for financing.
My quick numbers. I might be missing something.
Gross Potential Income: $163,800
Vacancy (10%): -$16,380
Laundry: $6,000
Total Income: $153,420
Expenses (25.14%): $40,104
NOI: $113,316
So you're borrowing $900k @ 5% over 30 years Am.
Debt service: $57,972
Replacement Reserves ($300/unit): $7,800
Net Cash Flow: $47,544
That seems like great returns on $100k down payment. Where does the negative cash flow come into the picture? Maybe my numbers are messed up somewhere.
Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
8y
There are not many areas in the city of Akron where I would consider paying almost 38,500/unit for one bedrooms. Maybe in the good part of Highland square in a building that had individually metered gas and electric. How old is the building?
But I have paid that for one bedrooms in akron... 2 side by side duplexes 1300 sqft/unit central heat/air washer dryer hookups. nice front door parking and those are a little under market at $600/mo built in 2000.
Real Estate Investor · Dallas, TX · Member since 2011 · 529 posts · 48 votes
8y
@Michael Le - Your numbers are pretty close to what I'm showing on my spreadsheet. The negative cash flow comes in when we adjust the operating expenses up to my "safe" rule of thumb which if 45%. (@45% OpEx the Cash Flow drops to $-14 per unit/per month)
However, if he does have Op Expense of 26.14%, then this becomes a more do-able deal. (Per unit/per month cash flow of $89....closer to the $100 per door/month rule of thumb)
Real Estate Investor · Dallas, TX · Member since 2011 · 529 posts · 48 votes
8y
@Ryan Ball - Agreed. 10.8% is not bad. That Cap Rate drops down to 7.64% if we use the usual Class C Op Exp of 45% instead of the 26.14% that the owner provided.
Real Estate Investor · Dallas, TX · Member since 2011 · 529 posts · 48 votes
8y
@Jill F. That's what I was thinking too. It is not in Highland Square. Built in 1981. Owner is paying gas, exterior lights, and water for all tenants. This another reason that 26% OpEx seems low to me.
Galva, IL · Member since 2017 · 37 posts · 26 votes
8y
How’s the plumbing? I recently purchased a 40 unit and knew the copper from 1970 was not the best... it’s proved bad very bad. Im still doing ok but wish I had adjusted the numbers for that issue.
Rental Property Investor · Barrington, IL · Member since 2017 · 208 posts · 310 votes
8y
Keep us posted. I'm curious for my own learning as well. What are the actual expenses? Are you going to use property management? How will this change your overall expense numbers? Based on higher expenses (resulting in negative cash flow) what are you going to offer? What is your "minimum" acceptable cap rate and CoC return numbers.
@Michael Le - Yeah. That OpEx does seem mighty low. My rule of thumb is usually 45%.
As for why I think it's priced high, I like to find property at $25K per door or less. At $1 million, the price per door is $38K. Aside from that rule of thumb, I shoot for $100/door in cash flow. At $1 million, with financing, this one negative cash flows.
This is what makes me think the price is too high.
If I gave the full asking price, and financed it at 5%, (10% down, 5 year balloon, 30 year amortized), I would be negative cashflowing to the tune of $-14 per month/per unit ($-364).
Underwriting
The seller is willing to finance the deal at 10% down and 8% interest. (I think I can beat that)
I'm looking at private money lenders for financing.
My quick numbers. I might be missing something.
Gross Potential Income: $163,800
Vacancy (10%): -$16,380
Laundry: $6,000
Total Income: $153,420
Expenses (25.14%): $40,104
NOI: $113,316
So you're borrowing $900k @ 5% over 30 years Am.
Debt service: $57,972
Replacement Reserves ($300/unit): $7,800
Net Cash Flow: $47,544
That seems like great returns on $100k down payment. Where does the negative cash flow come into the picture? Maybe my numbers are messed up somewhere.
This is a good analysis. Also, keep in mind there are acquisition, lender required reserves, and closing costs. So it really wouldn't just be $100k out of pocket.
Hey Todd - There's a few other items that I didn't see discussed in this thread (apologies if they were discussed and I missed them) that I would consider when determining whether or not the asking price of $1,000,000 is reasonable.
Do you know the Akron market and sub-market that the property is located in well? What are the rents of the comps and what have similar properties traded at recently? What is the supply like, growing or shrinking? In addition, do you think there are catalysts to be able to grow rents going forward or is it possible market rents will be on the decline?
What kind of credit quality do the current tenants have, is this a factor that went into your 10% vacancy assumption?
When was the last time units were renovated and do you think they will require capital improvements anytime soon? If so, is it reasonable to assume you could achieve at least 10% annual return on potential renovation costs?
These are just a few things that I would recommend considering in your underwriting to determine a good price to pay if you are not currently doing so.
Rental Property Investor · Papillion, NE · Member since 2017 · 398 posts · 1k+ votes
8y
@Todd Keith like many others have said the Op Expenses seem to low. If for some reason they are that low than the only value add opportunity will be through increasing rents. Is this a property in which you can increase the rents?
Real Estate Investor · Dallas, TX · Member since 2011 · 529 posts · 48 votes
8y
Hi @Rich Nordstrom. No idea about the plumbing. We haven't performed an inspection yet. In the initial phases of the deal right now. I have heard the same thing about SFR plumbing from the 1970's and earlier though. Some of the pipes had almost completely deteriorated in a fellow investors rehab property. That added on some unexpected expense. I'll keep an eye out for it on this one. Thanks
As for property management, it's self-managed now, but I added on 10% of GYI, (16K) since I plan to have a property management co. run with it. OpEx Grand Total: $44,380 (26.14% of GSI)
What I'm going to offer: I have a few options I plan to present him with depending on the interest rate he's willing to accept.
Real Estate Investor · Dallas, TX · Member since 2011 · 529 posts · 48 votes
8y
Hi @Vince DeCrow. I wouldn't say I'm an expert on the market, but learning more every day. All good points. I'll add those to my due diligence list. Thank you!
Real Estate Investor · Dallas, TX · Member since 2011 · 529 posts · 48 votes
8y
Hi @Collin Schwartz. Good questions. Yeah. This one concerns me a little. There's not a lot of room to increase the rent right now based on comparable rents in the area. Don't think this one would be a value-add opportunity. Just a buy-and-hold cash flow play. (Which is why that $/mo per unit amount is so important)
Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
8y
You can always offer the $1MM and adjust if you discover something in due diligence, but I agree with @Ryan Ball. Expenses seem to low, and laundry revenue seems way high @Todd Keith
Investor · HI · Member since 2017 · 328 posts · 124 votes
8y
I don't see a line for repairs and maintenance. You should ask seller for the last 2 years of repairs and maintenance receipts to give a better picture of opex. Ask property management to do 6-8%. In any case, your opex is too low skewing your NOI and obviously your cap rate.
Hi @Account Closed - I'm suspicious about the low OpEx too, but at the same time there's that little voice in my head that keeps saying "What if...."
Just curious: If you saw OpEx of 26% would you just walk away?
Yes! If OpEx is being reported at 26% than economically speaking, the market would not support it. There would be a huge influx of dollars to that market since this would mean that the properties in this area are reporting high income and low expense. It doesn't make sense.
Again, I would stick to my rules and walk if a property doesn't show at least 45-50% Op Ex. There is no point of me digging further because I know when I underwrite, the numbers will just not work. And when it comes to DD and I find out the numbers actually do not work, then I just wasted all my time. I would advice you not think "What if..." and rather let the numbers and your analysis of the market do the talking. Hope this helps!