Hey all! I've read these forums for a long time and have learned a lot, especially on the multi family side, so I want to say thank you to all who take the time out of their busy lives to help fellow investors out.
Looking for ideas to structure this off-market deal in SE Wisconsin:
18 unit (14-2bd, 4-1bd) brick apartment building built in 1973 (looks like it hasn't been updated since 1974 either).
- current rents as reported to tax assessor in Jan 2017 = $12,860 (10 for $770 ea, 8 for $645 ea)
- current taxes are $12,580 (WI bases taxes on the reported income I was told)
- yearly expenses of $61k include
-sewer (a killer at $10,320/yr), water (well), gas for boiler, common area electric, insurance, 5% management fee, $800/mo CapEx, garbage, insurance, and maintenance fees
- all units were reported rented to assessor although at least 5 units have obviously been vacant for a long time (as evidenced by the several months old gas/electric company shutoff tags hanging on the doors). And I've been watching this building for a few months attempting to make contact with the actual owners.
- assessor (extremely knowledgeable) tells me its an 8.5% Cap Rate and the Village it is in is highly desirable and runs 5% vacancy on multi-family (due to taxes, schools, location, etc.) and has the building valued as-is at $657,000. He told me he gives this building a 10% vacancy assumption and was unaware of the shape of several of the units (vacancy more like 20%).
Based on the loan history I can surmise that the owners have a lot of equity in the building after having owned it for 20-25 years, but they are not property managers in the least bit. The current mortgage from May 2017 was for almost 70% of the Assessed Value and borrowed against this property for another property they have owned several years. A month ago I initially sent them a letter stating my interest in the property and their reply was basically "yeah we would be interested, what's your offer? The building most likely needs about $150k-$200k in upgrades and deferred maintenance from years of neglect.
Do I figure this building at the assessed value or what I know the real value based on the vacancy to be when I write up an offer. Bank wants 25% down, 5.5% interest rate, 20 year amort., 5 year balloon.
Based on area comps including the 100 units right next door, I believe the rents could be $14,900 a month after a renovation with an NOI of $95k per year prior to the debt service.
If I partnered with my brother for $100k ea (half of the after reno. down payment), do you wait to get paid back until the refi or on the cashflow? We are both long term investors in single family, so want to keep some liquid capital for opportunities.
How do I present this deal to the seller's to motivate them to sell (presuming there is a deal to be had, which I think there is), and to make it favorable to them tax-wise? I have limited knowledge on seller carry-back loans, etc. Any advice would be appreciated.
Interesting that it is assessed at actual performance.. That is not standard in Wisconsin, although I have seen it done.. Normally I would say what they are reporting to the assessor would be a great place to start... No one tells the truth to the assessor! I know I was a licensed assessor for a number of years..
You really need to get inside to confirm the interior condition and mechanical age before you can offer. 40% seems really low for expenses on a building that age especially with that water bill.
Best of Luck!
All of the expenses have been confirmed by me by contacting the sewer department, WiscoEnergy, etc. The tenants pay their own electric and cooking gas.
The assessor told me he wants to stay on top of the values so he requires landlords to submit the rent rolls that way, but I have no idea why the owners wouldn't submit the true Financial picture instead of saying that the entire building is rented out. All that does is increase the taxes. A few of the units are not in shape to rent at all.
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@Rich Wilken The assessed value is irrelevant. You clearly have run a thorough proforma on the property. Take that, assume a period of time to get the Capex done and remaining units leased up to full occupancy, and generate a proforma NOI. Compare that to current turn-key cap rates on the market, and set a higher cap rate to compensate for your risk. Use that Cap Rate and NOI to get to a value to make your offer.
Present your analysis to the seller using an even higher cap rate. They will haggle over the expenses, and possibly the cap rate, which inherently gives you some room to move on price (back up to the point where you would be happy with).
Thanks @Peter Bowen and @Yousif Abudra for your replies. That gives me some insight into an action plan.
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