What would you offer?

15 Replies

Looking at a Quadplex in a nearby city.  Just curious how much you would offer, and at what point you would no longer consider buying.

Background

4 plex - located in a C+ area.  Half a block off the frontage road to a very busy major highway, but great access to everything in town.  Surrounded by other efficiency apartments, duplexes, and quadplexs.

Almost 50 yrs old.  3/4 occupied. $650 x 2, and $550 x 1 (10 yr tenant).

All units are:  2/1.5/0 with patios, and 2 parking spaces.

Ask:  $220k (55k/unit) --- similar aged duplexes are listed for 60-70k/unit, but small MF 8-units in C/C- areas are listed from 28-35k/unit.

Total square footage ~4400

Taxes:  $2800

Owner pays sewer/water:  $250/mo average

Insurance quote I got was:  $3636/yr

Figuring 8% for PM, and 10% cap ex and 10% maintenance/repairs.

The vacant unit was in very good condition, but had not been updated in several years.  Minimum - new carpet (or hard surface flooring in major living areas, stairs, and bedrooms), possibly some updating in the bathroom (toilet, shower insert, tub), and either large hole patching in the parking lot or repave the parking lot (no estimate on this yet)

Appraisal from local appraisal district = $126k

The property is great in the < $164k range by my numbers.  My goal is to get ~$100/unit/mo cash flow with the above estimates for PM, cap ex, and maintenance/repairs.  That way, if I self manage - I am closer to $150/unit/mo, but I don't have to depend on self managing to be profitable.

So how insulting is it to come in around $130k, if I want to end up around 160k?  Looking at 20% down and 20-30 yr notes.

The property is owned by an investor group that bought as part of a package and now are offloading a few of the properties that they bought at a discount.  Should I be concerned?  Investor to investor, should I pitch seller finance as a way for both sides to win?

Thanks

My approach would be to run your numbers through a deal analyzer being very careful about including all expenses. Be conservative, add PM, R&M & CapEx as you mentioned. Double check your costs on insurance and other variable cost items that may impact the deal. Once you have your numbers solid, including a return that works for you, print out some version of this to the seller with notes next to line items if necessary. It is a lot easier to make an unemotional offer to the seller when you can present a business case. They may reject your offer because they can get more for the building from a less educated buyer, but that's what this business is all about.

I will let others with more experience speak to the per unit metrics and some of the other intricacies. 

This is a rough example of what I will present to a broker when I'm justifying my numbers. I might clean this up a bit before presenting to seller with LOI.

My question is, "What is the exit strategy?" You said it is surrounded by similar properties, which means there is no shortage. Who is the ideal buyer of this product in the future? Investors who want a deal, like you. So it isn't an appreciation play. Your rent will have to stay competitive with all the other quads in the area, so it isn't a value add play either. Is the cash flow good in your opinion? Maybe if it is owned free and clear.

Begin with the end in mind.

My question is, "What is the exit strategy?" You said it is surrounded by similar properties, which means there is no shortage. Who is the ideal buyer of this product in the future? Investors who want a deal, like you. So it isn't an appreciation play. Your rent will have to stay competitive with all the other quads in the area, so it isn't a value add play either. Is the cash flow good in your opinion? Maybe if it is owned free and clear.

Begin with the end in mind.

@Matthew Ries - some good advice here, but I tend to keep it simple. Like you, I have a $100/unit cash flow criteria. I underwrite the deal to accomplish that and that's my ceiling. I don't think $130k would be an offensive offer as it gives you room to negotiate. However, I would want clarity on how long unit #4 has been empty. 

Great suggestions by everyone. The best I would say is to verify your numbers, keep emotion out of it and offer what works best for you. If they reject the offer, then move on. They may reject you offer now but come back to you later. 

@Scott Skinger Thanks Scott.  I didn't consider actually giving a copy of my numbers to the sellers.  I have run the numbers on other properties and then told my agent "based on the numbers (rent, taxes, ins, mortgage, etc" I am offering $X and won't be able to go any higher than $Y."  Providing the spreadsheet might help them understand where I am getting my numbers from and that I'm not just pulling them out of thin air.

@Anthony Dooley Thanks Anthony.  That's a good point, and one I have considered....who is the target owner for this property and the answer is - it's an investor.  For the right price, and cash flow > $100/unit/mo, I like the idea of buying and holding. The units will need updating, but I don't think it would be a major value add (not much ability to add square footage or expand the half bath, electricity is individually metered) except billing water/sewer back.   Also, its difficult finding recent comps in our area for these types of properties because we have very few of them, and they aren't changing hands often.

@Jay Helms Appreciate it Jay. I was trying not to oversimplify or over complicate the deal/offer. Unit 4 is just recently vacant. They have a realtor sign in the front of the building, but it's not on the MLS. Marketing for a tenant and for buyers doesn't seem to be very aggressive.

@Juan Vargas Great point Juan.  My offer may not be what they want now, but another few months on the market - they could come calling.

@Matthew Ries Properties like that often are sold off market. I don't doubt that you plan to hold it for the long term,  you may not have a choice. If you think $100 per door is good money, then you will need a lot of doors to get wealthy.

Originally posted by @Anthony Dooley :

@Matthew Ries Properties like that often are sold off market. I don't doubt that you plan to hold it for the long term,  you may not have a choice. If you think $100 per door is good money, then you will need a lot of doors to get wealthy.

 True, most of the small MF and duplexes/quads in my area are sold off market.  That might be a red flag that this property is even available through an agent.

I guess that's my novice naivete, thinking $100/door + cash flow after mortgage, taxes, insurance, 8-10% PM, 10% capex and 10% maintenance, is a good investment.  

It's been my understanding that the equity built in the property (by someone else paying down the debt) is a major part of the long term "wealth" building.  The cash flow is an added bonus, and helps to perpetuate the cycle of accumulating properties.

In my area, one can get $200-300/mo + cash flow (after the above mentioned expenses), but you will be in less desirable parts of town and have higher tenant turnover, evictions, and outstanding debt.

@Matthew Ries If it's a quad I don't know why you'd be looking at a 20-30 year note.  You just put down 20% or 25% and get a 30 year fixed rate mortgage.  I'm not entirely sure why you'd think about a 20 year note.  And when you do get the 4th unit rented odds are that sewer/water bill is going to be $330/month!

So let's say you get the vacant unit rented:

$2,500 gross rents

-$333 sewer/water

-$233 taxes

-$303 insurance

-$250 capex

-$250 maintenance

-$250 (call it 10% for PM)

--------------------------

$881 for debt service and PROFIT

Let's say debt ends up being $130K for quick numbers at 5% for 30 years...

$698/month

$183/month free cash-flow which is $46/unit

Hopefully you can come up with some better terms for your debt!  For what it's worth, the insurance seems high (but I don't know Texas) and the water/sewer bill seems pretty high (but you can't do anything about it).  Taxes are high but that comes with the territory in Texas.

But the way, this completely ignores vacant and turnover which you probably want to model at 8%...

So I'd make your offer and see what happens.  I wouldn't fret over it, just see if they even both to counter and (if they don't) move on.  

@Mattew Ries debt pay down is a part of wealth building, but you don't want to have a million in equity with no cash flow. Focus first on cash flow, then when you have a lot of income, pay off the debt and preserve capital. 

Example: A farmer owns 1000 acres of land worth $1M. If he doesn't grow anything, he has no income from the property even though he is a millionaire. 

The $300 cash flow area will make you wealthy faster. Then you can become more selective.

I would advise you never tell your agent how high you are willing to go. As long as your agent knows you are willing to pay more he will not do the best job of selling your offer.  Never open that door or your agent will not do his best every time. Trust is nice but never lay all your cards on the table up front.

$100/ door cash flow is not good enough for a C class property, you need to do better than that to survive.

You should never consider equity build as wealth building. The fact is you may never see a dime of it for more reasons than you can imagine. Equity is worth nothing till you pull it out. Chances are you could die before ever realising a dime of it. Cash flow is what you need to continue to survive.

Better option, if you do have equity growth, is to pull it out regularly and invest it else where so that it actually earns it's keep. Dead equity is a liability that will only kill your properties true cash flow.

Originally posted by @Anthony Dooley :

@Mattew Ries debt pay down is a part of wealth building, but you don't want to have a million in equity with no cash flow. Focus first on cash flow, then when you have a lot of income, pay off the debt and preserve capital. 

Example: A farmer owns 1000 acres of land worth $1M. If he doesn't grow anything, he has no income from the property even though he is a millionaire. 

The $300 cash flow area will make you wealthy faster. Then you can become more selective.

 We are in agreement there.  

I personally would love a property to be in the nicest part of my town, fetching the highest rent, and netting me $300/mo in cash flow, but that does not exist in my city (even self managing, one won't be able to beat the property taxes in the best school districts at market rents).

I see it as a balancing act (cash flow & equity).  I can find properties in the least desirable part of town that will cash flow $300-500/mo, but in the end - is that property worth the headaches? It certainly won't be appreciating (much, if any), and I may have difficulty selling the property in the future.

Sacrificing some cash flow, I can find properties in more desirable parts of town with stronger resale values, higher rents, and more stable tenants.

Appreciate the insight everyone, thank you.

@Matthew Ries

Hi Matthew

Try to calculate the NOI on the property and put in your offer based on the current numbers and the market cap rate. The property is a bit small to use cap rates, so I would use the 28-35k/unit for smaller multi families.

There is no such thing as an insulting offer if you can back it up with your underwriting. The vacant unit is going to hurt them. Is there any way you can push rents or generate fees to increase the income.  The appraisal you received is part of your ammo when yo put in your 130k offer.  I would put in a precise number, 131,550.  It makes it appear as if you have crunched the numbers and have not thrown in a random number. What is their ask price?

Gino

@Gino Barbaro Thanks Gino.

So the asking price is $220k (55k/unit).

I know a quad is technically "residential" for financing and comps, but I prefer to consider the cap rates and per unit cost when analyzing them.

The electric is already individually metered.  The 2 places I saw to increase monthly income is:  1) get all 4 units up to $650/mo rent (the $550/mo tenant is a 10 yr+ tenant --- is it worth upending a long term tenant? maybe slowly increase his rent to get to market rates and 2) partially bill back the sewer/water that is ~$250/mo and owner paid.

My fear is this:  if my numbers and the ask price as this far apart (profitable at $130k vs 220k), and I want to land at my number - I'd have to start lower than $130k and come up to it.  However, you and others have suggested running the numbers and providing an offer based on what my analysis shows.  I agree this is what I should do, but it will more of a "take it or leave it" type offer - which I shouldn't feel bad about either.

I appreciate everyone's assistance.

@Matthew Ries

The rent bump has to be done. It's like ripping off a bandaid. Just do it and you will be thrilled!  Maybe do one at a time, but it has to be done.  Driving the revenue is a key to increasing value.

Having relationships with brokers is also key, because you can always ask the broker for price guidance. I would begin lower and work my way back up. Create a strike price in your mind and do not exceed it.

Gino

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.