84 Unit - Deal Analysis Case Study

10 Replies

This question is for you seasoned mf investors out there. I'm trying to learn more about how you might look at property so I can refine my own criteria and become more efficient in my analysis. For this example, let's assume that the building(s) fits my criteria (25-100 unit building with a minimum NOI of $150K, cash flows, local to me, etc.) and the numbers work. I would like to know more about the other factors that you consider...good and bad.

The example building is on Crexi, https://www.crexi.com/properties/95716. Again, I'm not asking if this particular deal is good, just using it as an example to ask some questions that have come up several times before in my head.

-located in Mt. Pleasant, MI a town of 25K people, an hour away from a bigger city...instant deal killer?

-2nd biggest employer is Central Michigan college...good/bad?

-a mile away from campus, I'm sure that there are students and residents living there, any thoughts?

-84 units in 20 different buildings...a lot more R&M, capex versus one building?

-there are 6 vacant lots on the parcel to "build more units"...it is pitched as a benefit, perhaps it is not, will cost more in taxes, maintenance, insurance, etc.

-it doesn't say anywhere in the listing or OM, but there are a few more buildings in this complex that are not part of this deal, I'm assuming that there is association as expenses like landscaping, snow removal, etc. are not mentioned. Outside of the added expense to consider, are associations inherently bad?

-anything else that you see to consider when looking at a property?

After typing this all out I realized that I'm asking for a lot...so maybe just answer one or two of my bullets if you can. Thanks in advance!

For me I'd need to know what the rent roll looks like and how does it compare to my competition in town..... If rents are low and vacancy is low then you should be in a good position IF, there's not new housing coming on line that's better than yours. You can check out the health of the school with simple google search...

https://www.cmich.edu/office_provost/academic_admi...

I think the easiest thing to do is look at the building for what it is and figure out it's value vs trying to apply too many hypotheticals. Understand how the numbers interact with each other and then apply that to other properties. Like capex etc is probably lower on this vs a smaller bldg w/ more units if it's older etc...

I like Central Michigan. The enrollment of the school is steady and it seems close enough. I don't think you have to be in a large city to get a lot of value. College towns have a lot of rent to offer.

The thing I don't like about this deal is the pro-forma evaluation. They are currently getting $650/month. If they could get $750, why aren't they? In a college town, I would imagine you get a lot of turnover, so raising rents shouldn't be a problem. Don't go off the $750/month valuation.

The 7 acres of property is a huge deal. Upkeep on the 7 acres is bad especially with all the trimming you will be doing.

They also already sold off some units. Why didn't the other guy take the acreage? It's a hassle that's why... I say, if you work a deal, be realistic about the amount of upkeep there is on the extra acreage. Also, use the $650 rents they are getting, not the proforma $750...

IMO, the rent being at $650 and the extra land puts the NOI at around $275k and if you are going to mortgage this thing, you can kiss any cash flow goodbye.

Another thing to keep in mind, if they sold off some units already your competition is going to be that other landlord. If he doesn't raise rents or keep up the property, it's going to directly work against you.

@Scott Skinger happy to see you're starting to analyze deals and taking action! A resource that many new MF investors don't take enough advantage of is partnering with an experienced property management company. They can easily knock out a lot of these questions for you. Most likely you will be using one anyways if you're up in the 75+ range. They will have intimate knowledge of the area and be able to compare this prop against other props in their portfolio.

This is where your relationship building hat will be important to establish repertoire for them to view you as a potential client and not just a tire kicker.

As for college, neither good or bad. Just know if you try to get agency debt, they will not lend on a property with a heavy student concentration on the rent roll.

Good luck!

@Abel Sng Thank you, very helpful. I wasn't aware of the agency debt limitation regarding student concentration. 

If you have the time, a have an open ended question(s) for you regarding property managers. When is it appropriate/reasonable to engage a property manager to help me evaluate a property? What about when I'm evaluating an property (pre-LOI) and just doing a tour? What if the property is smaller building, say 30 units. Is it now not worth the PMs time?

Thanks!

@Scott Skinger

Isn't it funny they even put "Proforma" Cap. Who cares?  What is the actual cap rate.  Last 12 months of P&L.

Biggest question is "Why are they selling". You need to gauge motivation and see how you can solve their problem.

Associations can be an issue. What happens if the other members don't pay dues. What is the recourse.  This issue needs to be investigated now and heavily during due diligence.

Ask these brokers if they have any more deals.

25k people is not bad. Find out occupancy rate in the city to determine demand.  You also need to find out typical tenant and what the unit mix is and the rent they are paying.

Finally, contact a mortgage broker/banker in the market to determine what it would cost to run this type of property.

Curious to see what they are running it at.

Also curious to see what the property is priced at an actual cap? 5?

Speak soon Scott

Gino

great questions for next week's call

84 units on 20 buildings. That is basically 20 quads. Lots to Capex indeed.

Sharing the space with other owners!!! I have seen lenders refuse to lend because of the shared responsibility on the common areas. Brings additional costs for an HOA. What if the other folks don't pay their share?

Would always engage a PM on the first "informal" visit to the property to have additional pair of expert eyes with me. 

Did seller share landscaping costs? You might call a local  landscaping company and get a quote. I'm sure it is higher than expected because of the setup of the property and the large empty space. Also, costs of dealing with snow/ice with such large/spread space ... 

There is definitely lots of things to chew on and factors that will impact your profit. Try to know about these costs as much as possible and add them to your version of numbers. I doubt the seller will willingly share them. 

Good luck.

@Gino Barbaro @Henri Meli @Abel Sng Thank you! Just the type of information that I was looking for. Basically, trying to compile as much “real world” knowledge as I can from you guys that are out there closing deals.

PM me and I'll give you some info on a course that will teach you this very thing--for $35-45.  Seriously.

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