Day 1: 24 Unit Apartment Complex Deal Analysis near Austin

9 Replies

Hey Everyone, my goal is to analyze at least 1 MFH deal a day for the next 30 days. For Today's Deal, I am analyzing a 24 unit complex I found on Loop Net (Address: 11519 Pecan Creek Pky). Below are the details:

Ask Price:   $2,595,000

25% DP:   $648,750

Monthly P&I (30 Year Amor @ 6%):   -$12,897.15

Annualized Market Pro Forma Numbers

Pro forma Rents (24, 2/1 units at $995/month):   $286,560

GOI with Vac/Cred at 8%:   -$24,357.60

Pro forma Expenses at 30%:   -$85,968.00

NOI:   $176,234.40

P&I:   -$154,765.80

Cash on Cash Return:   $21,468.60

Deal Metrics

Cap Rate:   6.79%

Debt Coverage Ratio:   1.14

Cash on Cash Return:   3.31%

Cost Per Door:   $108,125

Adjust Rent/Price Ratio (per door basis):   0.9202%

My MFH investing education is still on-going, but it looks like the seller is trying to sell this as a stabilized asset. Personally, for a complex built in 1979, the price seems a bit reach. The numbers do not seem to work for me either as, at a minimum, I'd like to be at 12% cash on cash with a DCR above 1.25. Also considering that market rents are near $995, there doesn't seem to be a value-add play here. To make this deal work, I would need to pick it up at $1,975,000, which would be a CAP Rate of 8.92%, providing me with a Cash on Cash ROI of 11.84%. The cash flow would effectively shift from $74.54 per door to $202 per door making this deal more attractive.

What are your thoughts? 

Logic looks sound to me. I would get property tax returns from seller to accurately determine an expense trendline, and also make sure your ROI is including an adequate set-aside for reserves, especially for a property of that age. Seller could be trying to dump the property at the crazy prices we're seeing today before some major CapEx is required.

Did you underwrite income and expenses or took them from the listing? Either way, expenses are too low.

You need to learn how to estimate future expenses and rents.

Originally posted by @Nick B. :

Did you underwrite income and expenses or took them from the listing? Either way, expenses are too low.

You need to learn how to estimate future expenses and rents.

 I don't think an expense ratio of 30-35% is a bad starting point before securing real financials. On a per unit basis it seems light, but that varies by market.

@Nick B. I underwrote the income according to similar market rents (rentometer.com) and estimated the expenses from the hip. The rent is adjusted down since renters can get similar sized properties at a community with nice amenities - and more - for $1165 on average. I've learned that 40% to 50% is the norm in conservatively estimating expenses. What do you use?

@Kyle Jean Good point on the set-aside. I had figured the following expenses: vacancy/credit (8%), Property Management (8%), Property Taxes (4%), Insurance (3%), CapEx (10%), and Repairs (5%). I thought I was being pretty conservative at 38%

On a side note, the reason I used ProForma numbers is two fold:

1. No T12 was available for the property nor any other information (NOI, CAP).

2. I'd like to buy the asset at a price that conforms to how I expect it to perform, at a minimum. 

Any other thoughts or suggestions?

@Account Closed

If you don't have any information about financial performance of a property, you're wasting your time trying to underwrite it. At minimum you should have current rent roll. That's your starting point for rent analysis. You need to find out if a) there are empty units that can be filled at the current rents and b) current rents can be increased because they are below the market. All that with at least 10% economic vacancy.

On the expense side, you need to go line by line and underwrite every expense category. Never use percentage of rents to figure out expenses expect for the PM fee (8% for small properties, 3.5-5% for large ones). Everything else should be in dollars per unit (repair & maintenance) or per property (contract services such as landscaping). 

Ask a few property management companies what expenses they see for each category on the properties they manage and use averages or pick from a range. NAA survey can also give you a high level starting point.

Utilities can be estimated based on the current numbers but, again, you need to see T12 for that. Otherwise it's a shot in the dark.

For taxes, look up the tax rate in the area where the property is located and use that rate and 80-100% of the purchase price depending on how aggressive or conservative you want to be. Be ready for tax increase next year after you purchase and plan it in the next year expenses.

CapEx should be budgeted at $250-300/unit/year.

@Nick B. pretty much nailed it. Additionally, I will add:

-I don't think 38% expense ratio is being conservative, being at 50% is conservative and some buildings exceed this

-bank won't even lend on a deal with a DSCR that low, you need to underwrite to at least a 1.25 or the deal won't get done

-figure out what financing vehicle you're using, agency debt (Freddie) is possible at a lower LTV and interest rate but comes with requirements, community bank is tougher to get 30 year am on

-I see nothing about exit assumptions, you might have to refi/sell after 5 years with higher interest rates and a softer market...then what? You need to model in a conservative (higher) cap rate at disposition so you are purchasing at the right price to deliver CoC and IRR

That's it for now.

@Account Closed WCAD has 2018 taxes at $36,430 on an appraised value of $1.484m ($2.454 x $100.)  That alone is 42% of your pro forma expenses.  While Texas is a non-disclosure state, the appraisal districts are pretty good about capturing values off deeds of trust, etc so expect that number to be higher after the sale unless you bring a lot of cash to the table. Agree with others that your DCR is too low (1.25 is lowest I've seen quoted) and in my limited experience I've only seen 15 and 20yr terms on commercial RE from community banks.

If you can purchase MF in Austin at a cap above 7, I salute you!

That's why, even though I live in Austin, I'm not buying in Austin!

John

I agree with @Scott Skinger conservative is 50% of Gross income. 

very unlikely its 35%.  Repairs will be more 5% and Property management i will underwrite at 10%. unless you know you have a good PM in that market you know that would charge less.  Do you use a calculator @Account Closed   ?

Others have already provided great feedback, so I just want to respond to one comment you made in your OP. You say you would like to be at a 12% CoC return at a minimum, for a small multifamily property in Austin proper. That's incredibly out of line with the market, but you'll figure that out for yourself as you continue to analyze more deals. You might be able to achieve that on a deep value add play... maybe.