Help analyzing a 22-unit deal, (my 1st commercial multifamily)

Multi-Family and Apartment Investing
8yFollow

Help analyzing a 22-unit deal, (my 1st commercial multifamily)

Vince Gethings
Rental Property Investor · Midland, MI · Member since 2016 · 76 posts · 31 votes

Good Evening BP!

I have a property I have been looking at and I would like to see what the community thinks. The property is a C+ class in a great city with good schools, and stable job market. Rents are below market (9% on the 2beds, 18% on the 1beds), I think its due to passive management. 

22 units (2 buildings, brick low-rise)

Asking Price: 1.2M

7 Cap Rate

NOI: 89,191

2016 financials:

Income: 151,083

Accounting fees: 2,492 

Legal fees: 347

Insurance: 3,100

Repairs: 22,511

Utilities: 7,665 (landlord pays trash and Water

Contracts: 2,840

Taxes: 26,402

My underwriting of this deal, says the purchase price should between a 7.5-8 Cap. What do you think?

About me: I have 13 units in this market, however, they are all duplexes and fourplexes. I want to break into commercial in 2018. 

Thanks in advance!

Vince G

0Reply
16 views

Most Popular Reply

Jason BottPro Member
Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
8y

@Vince Gethings

Since it is your first deal, you should know that it's not that easy to get the same insurance deal the seller has. 

Insurance seems very competitive for a C+ neighborhood.  I'd firm up that # .

In the last year or so insurance carriers have been declining to offer proposals in higher crime areas. 

3Reply
See this reply in the discussion

15 Replies

Jump to latestLatest
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Vince Gethings, if it's true that "the purchase price should between a 7.5-8 Cap", then why would you even think about paying a 7 Cap? That helps the Seller only!

    I haven't looked deeper into it, but it's a no-brainer decision to want to buy it at a higher than prevailing Cap, not lower or even the same. Cheers...

    1Reply
  • Account Closed
    Pittsburgh, PA · Member since 2010 · 123 posts · 48 votes
    8y

    @Vince Gethings - The operating expenses seem low at $2,970 per unit.  You may be accounting for property management in your underwriting but I didn't see it listed.  It seems like the cap rate would actually be lower with market based expenses. 

    I think it would help to see your underwriting and projections:

    Can the rents just be increased, or is renovation required to bring them to market rates?  

    Do you expect taxes to increase following the purchase?  

    Is your insurance rate going to be in line with what's listed?  

    What is your management cost?

    What kind of return are you looking to achieve?

    I think once these questions are answered, you can figure out the price that makes sense to you.

    Hope this helps.

    2Reply
  • Jason BottPro Member
    Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Vince Gethings

    Since it is your first deal, you should know that it's not that easy to get the same insurance deal the seller has. 

    Insurance seems very competitive for a C+ neighborhood.  I'd firm up that # .

    In the last year or so insurance carriers have been declining to offer proposals in higher crime areas. 

    3Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    8y

    I agree with @Account Closed. Expenses seem light on this deal. You're missing management and Cap ex.

    Buying this at a 7 cap seems odd, since there is only a slight value add. 

    1Reply
  • Peter B.
    Investor · Ogdensburg, WI · Member since 2016 · 273 posts · 351 votes
    8y

    @Vince Gethings

    Agree with the above posts about cap ex and management need to be added.. Insurance would be difficult to match.. I would like the repairs to be broke down further. 22k on what exactly? Your utilities seem low.. The tenant must pay heat if this is in Michigan? Taxes are crazy high almost 2 months rent per unit just for taxes.  

    1Reply
  • Owen RosenBusiness Member
    Professional · Clinton Township, MI · Member since 2015 · 678 posts · 259 votes
    8y

    Insurance sounds very low

    Royal Oath Insurance Group4.9203 Reviews
    WebsiteView Page
    0Reply
  • Vince Gethings
    OP
    Rental Property Investor · Midland, MI · Member since 2016 · 76 posts · 31 votes
    8y

    Thanks for everyone who has posted so far!

    Just to clarify, the numbers I listed are the actual financials from 2016 as reported to me by the broker. Those aren't my projections.

    I will add my underwriting tonight when I get off work. 

    Owner self managed that's why there is no management expense for '16. Taxes are accurate, verified with the county. I need to adjust for my purchase price though. Insurance seems to be close, but I have not got a quote yet. As for my repair/costs, I have not seen the units, (I live in Hawaii, property is oin the mainland). ~6k per unit in this market will go along way. 

    0Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    Without disclosing the location it is close to impossible to make any judgement.  In our area cap rate is 1.5-2% and MF are sold first 1 week with multiple offers.

    2Reply
  • Duc Ong
    Real Estate Agent · Honolulu, HI · Member since 2015 · 450 posts · 196 votes
    8y

    @Vince Gethings I think you should offer at an 8 cap, and see what the seller says.

    0Reply
  • Vince Gethings
    OP
    Rental Property Investor · Midland, MI · Member since 2016 · 76 posts · 31 votes
    8y

    So I re-ran my analysis with updated taxes, repairs/Capex, and management and this deal died on the spot. Their "solid 7 Cap" turned into a 4 Cap with a C class property. Cashflow was barely nothing ROI was <2%. I'm going to put this place on the back burner for now and watch to see when the seller come to his senses and drop the price. Right now they won't even consider a "real" 8 Cap offer.

    Thanks for the feedback everyone! for now I'm going to keep looking and educated myself on CRE!

    2Reply
  • David K.
    Investor · Attleboro, MA · Member since 2016 · 137 posts · 51 votes
    8y

    Insurance will be double at least

    0Reply
  • Marcus Banasik
    Katy, TX · Member since 2018 · 3 posts · 0 votes
    8y

    Vince - are you buying this for cash? If not, what are your financing arrangements? How much will you put down? Interest rate? If you are financing this, the loan will eat up most of that NOI and maybe all of it. There is a high probability you won't get 30 year fixed rate financing for 22 units anything over 5 units is considered commercial and the banks lend differently - assuming 5% for 20 years with 20% down, your mortgage will be about $77,000 per year. That leaves you with $12,000 Net Profit on an investment of $240,000 (20% down) = 5% cash on cash return. Not a lot of room to maneuver.

    What is the current County Auditor's appraised value - if the sale price is a lot higher than the Auditor's appraised value - you could be in for an unwelcome tax hit.

    $55,000 per unit seems high for a C+ property in Michigan.  What have other MF properties sold for on a per unit basis in the immediate area?

    This one is no good at the asking price.  Not worth the risk.  IMO.

    0Reply
  • Jessie Niu
    Columbus, OH · Member since 2015 · 210 posts · 80 votes
    8y

    The expenses are definitely low, it's more like a 5.5% cap.

    0Reply
  • Kyle Jean
    Bedford, NH · Member since 2018 · 77 posts · 49 votes
    8y
    Originally posted by @Vince Gethings:

    So I re-ran my analysis with updated taxes, repairs/Capex, and management and this deal died on the spot. Their "solid 7 Cap" turned into a 4 Cap with a C class property. Cashflow was barely nothing ROI was <2%. I'm going to put this place on the back burner for now and watch to see when the seller come to his senses and drop the price. Right now they won't even consider a "real" 8 Cap offer.

    Thanks for the feedback everyone! for now I'm going to keep looking and educated myself on CRE!

    Unfortunately this is the norm these days. Be wary of broker or seller prospectuses that promise high cash flow, "turn-key" properties. They're almost always leaving something out of the equation. On to the next one!

    0Reply
  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Vince Gethings

    Hi Vince

    Looks like some nice value adds with the below market rent, and possibly billing back tenants for utilities.  What is the cap rate in your market for a C property? Do they have a management fee as part of expenses?

    Gino

    Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly
    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free