Any pros from NE that could help walk me through an analysis?

4 Replies

I've been researching multi-family for the past 7-8 months and I'm researching deals on a daily basis. I've found two that I'm interested in and I've done a bit of research and was wondering what my next steps would be. I'd like to take action in 2018 and I'm looking for some guidance. 

The current rents are just about right and slightly below the average. Property crime is below average. The units have been renovated recently with renovations like flooring and appliances. Tenants are also separately metered. As far as vacancy, it's 100% occupied... I know that this can't be quite accurate, but they have a large waiting list and seem to get people in very quickly if a tenant moves on. Also, these are self-managed and I'd need to partner with a property management group. 

New to the forum as well, so please coach me on best practices when sharing financial analyses. Also, I'm very much lacking in my financing knowledge and I don't have much capital myself. I know that this changes everything, but I'm looking for guidance and decided to post for the first time to try and move in the right direction. 

Thank you in advance for any advice or private messages about how I can take action in 2018. Thank you all and I wish you massive success this year. 

-Mike

Property 1: $650,000 | 10 Units | 8.2% CAP | 1Bed, 1Bath 

Gross Revenue Q3 2017MonthlyAnnual
Unit 1$ 615
Unit 2$ 630
Unit 3$ 615
Unit 4$ 745

*New Tenant 08/10/2017

Unit 5$ 615
Unit 6$ 635
Unit 7$ 665

*New Tenant 08/10/2017

Unit 8$ 570*Long Term Tenant
Unit 9$ 600
Unit 10$ 635
Annual$ 6,325.00
Other Income
Late Fees$ 58.33$ 700.00
Laundry Revenue$ 150
Total$ 6,533.33$ 78,400.00
Vacancy0
Expenses:
Cleaning and Maintenance$ 150$ 1,800
Insurance$ 442$ 5,305
Legal$ 41.67$ 500
Repairs$ 278$ 3,338
Taxes$ 606$ 7,276
Utilities$ 632$ 7,582
Total Exp$ 2,150.12$ 25,801
Income$ 4,383.22$ 52,598.58
*Current Offering Price$681,8127.71%

Units: 4,6,7,10 are on Current Leases

All other units on Month-to-Month from previous leases

Single Meter for Water/Gas, can be billed back to Tenant monthly

Electricity in Tenants Name

Property 2: 23 Units | $1,652,000 | 7.24% CAP

Unit Mix:Proforma:Rate/MonthSF/Unit
1 Bedrooms12$ 650.00$ 7,800.00800
2 Bedrooms11$ 800.00$ 8,800.001000
$ 16,600.00
Actual Gross Revenue Q4 2017:MonthlyAnnual
Unit 1$ 750
Unit 2$ 550
Unit 3$ 550
Unit 4$ 475
Unit 5$ 505
Unit 6$ 605
Unit 7$ 585
Unit 8$ 795
Unit 9$ 595
Unit 10$ 550
Unit 11$ 600
Unit 12$ 525
Unit 13$ 570
Unit 14$ 625
Unit 15$ 570
Unit 16$ 630
Unit 17$ 555
Unit 18$ 500
Unit 19$ 525
Unit 20$ 490
Unit 21$ 600
Unit 22$ 650
Unit 23$ 675
Monthly Total$ 13,475
Other Income
Late Fees$ 50.00$ 600.00$ 600.00
Laundry Revenue$ 245$ 2,940$ 2,940.00
10 Garages (Included in Rents)$ -$ -$ 4,200.00
Total$ 13,770.00$ 165,240.00$ 206,940.00
Vacancy: (100% Occupancy***)$ 688.50$ 8,262.00$ 10,347
Total:$ 13,081.50$ 156,978.00$ 196,593.00
*Assumed 5%
Property Management: (Self***)$ 915.71$ 10,988.46$ 14,485.80
Total:$ 12,165.80$ 145,989.54$ 182,107.20
*Assumed 7%
Expenses:
Cleaning and Maintenance$ 291.67$ 3,500
Full Coverage Insurance$ 710.42$ 8,525
Legal$ 50$ 600
Repairs$ 279$ 3,350
Taxes$ 1,392$ 16,707
Utilities$ 1,082$ 12,988
Total Expenses$ 3,805.84$ 45,670
Analysis NOI:$ 8,359.96$ 100,319.46$ 136,437.12
Asking Price/ Cap Rate$1,652,0006.1%8.3%
Current NOI/CAP-Actual Operating:$ 9,964.16$ 119,569.927.24%
Owner Improvements & Costs:
All New Windows$ 40,000
New Hail Resistant Roof & Gutters$ 40,000
New Garage Doors$ 10,000
New Carpet in Common Areas$ 8,000
New Circulating Pump/Hot Water$ 2,000
Unit Upgrades/Appliances$ 20,000
$ 120,000
Kitchen & Bathroom Reno:

Unit Cost $3,000; Resulted in $150 - $200/Unit Rent Increase

Owner creating a waiting list for unit reno's from tenant demand

Unit Rental Rate Inflations:

Rent Increase Notices given every year, Tenants aware & compliant

I looked at it.

All I will say is that sellers throw a lot of  crap out there to paint a rosy picture to position an asset to sell.

Seller self manages.

Quick and dirty guide to evaluating apartments:

If landlord pays utility take off 60% costs for expected gross income to arrive at NOI. If landlord does not pay water take off 50% costs.

So if 100,000 gross expected annual rents with landlord paid water 10 cap would be 400,000. No landlord paid utility 500,000 would be 10 cap. Expenses on older buildings run average 50 to 60% over time.

Check and see if market rents. Seller could give waiver of security deposit or half or free months rent to get them in at higher amounts to try and show more income to sell.

The 50 to 60% operating expenses DOES NOT include immediate deferred capex for repairs needed. That you get as a credit at closing from seller for reserves or reduce the price. I like reserves because you do not come up with your own cash to fix. Difference in purchase price for tens of thousands is usually hundreds of dollars a month in payment so I would rather have reserve credit of cash at closing to pull from. Lender will usually ask to be held in an account so money is dedicated to the property to maintain the asset.

1 beds tend to turn over a lot over 2 beds. Check loyalty factor over the years. Example if 30 tenants have 20 or more been living there 2 or more years and paying on time? Landlord could have just filled up occupancy after improvements recently. Improvements will draw crummy tenants also as they save up from stiffing last landlord and have just enough money to move into a nicer place for a few months. Some of the items completed by seller i am less worried about then sewer and water condition, electrical, lead based paint,asbestos,etc.

Find someone local to help you out with this property. 

Hey Joel,

Thanks so much for the detailed response. That all makes sense, thank you for explaining this to me. It definitely looks like they're painting a rosy picture, I'll keep looking in this market and others while keeping that in mind. 

Sorry about the repetition in my post, didn't realize I couldn't edit a post on this community. 

Thanks again and good luck hitting your goals this month. 

-Mike

What zip codes are the properties in? Before I could give a recommendation on anything else, I'd want to know that. (I'm on my phone and the formatting is weird, so excuse me if it's posted.)

Also - You're estimating property management at 5%, but I would put it closer to 13%. 10% base rate, plus upcharges for service calls and turnover.

The lender also is not going to use 5% property management like the seller is.

Lender will use appraisal and market averages for high quality PM management. Their reasoning tends to be if they take back the property on a defaulted mortgage they will not be managing themselves so will not underwrite it that way for evaluation purposes.

If this seller gave you a master lease or an option period before you buy and close on it with no personal guarantee then you might gain valuable experience and could walk away if it does not work out. If they want you on the hook then you have to be real,real conservative with the numbers. 

Just because a lender says YES to a loan does not mean the property is a winner either. 

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