First Large Multi-Family - Analysis Help?

13 Replies

Hey BP'ers - looking at my first large multi-family and need help knowing what the unknowns are.  Here's the data:

79 Units - Townhomes, with 24 separate buildings.  60% have been updated with roofs/siding, interior basics.  Rents are 20% low currently, with 100% occupancy.  Rental comps are supporting this.  Pretty strong economy.  Annual numbers are:

Built in 1984 - Seems to be a B class complex

Potential rental income $900K-$1M gross

6% vacancy ($60K), $20K addition income from vending/laundry - no other amenities, $65K taxes, 5% ($50K) Capex, $28K Insurance, $16K contract services, $90K payroll/staffing, $150K repairs/maint, $6k utilities (tenants pay their own), $10K accounting/legal, $5k advertising/marketing, $100K (10%) PM (is that redundant with staffing?) - TOTAL OPERATING EXPENSES: $522K, NOI: $445K, Debt Service: $240K, CASH FLOW: $200/door/month.

So...this is based on potential rents which means I will have a year or two of transition and potential CAPEX expenses. So how much do I need in reserves and what should that value-add schedule look like? How much should I pay? Looking forward to the conversation - thanks in advance!

I would be running your NOI based on current rents to make sure you're not bleeding money until you get rents up. Renovations always take longer that you plan so I would make sure there is cash flow there while you're plan is working. The deal needs to make sense day 1 not just day 365 or day 730.

The staffing number might be for on site management? If so, the PM at 10% is too high. Phil makes good sense. Analyze the property with the current income and expenses, not future. That's what should determine price. And, if 60% of the units have been updated, you need a CapEx plan to address the other 40% to increase rents. That should be a discrete cost line item and factored into the ROI, as most of these costs will be capitalized I imagine.

I don't see a rehab budget mentioned anywhere for the other 40% of units that are not updated yet.

@Phil Morgan - thanks for the good advice.  That puts me right at about $100/m/unit on cash flow.  Bare minimum...but still cash flowing.

@Ed Matson , I fudged their numbers up a bit because they seemed low at about 30% for expenses.  Mine are closer to the 50% rule, so I'm playing it conservative.  What's a realistic PM cost for a complex?  I'm assuming that an on-site manager is not as effective as an experience PM company in the area? Can you explain what you mean by "discrete cost line item?"  My "plan" for improvements would be to gradually raise rents every six months.  When a unit goes vacant, rehab interior.  But I can start on the exterior work immediately.

@Don Nelson , We have a 46 unit MF. Our total Op Ex is about 40%, so I agree 30% is low. 40% seems about right for our size and age (17 years) property. We pay in the range of 8-9% for property management. Of this about 60% is for the resident managers and their payroll taxes. The on site manager and asset manager are two different components of property management. For 79 units you would be wise to hire a PM company that will provide on site managers. By discrete line item, I mean I normally add my estimated rehab costs to the purchase price to determine my total capital cost. If you plan on funding the interior rehab from operating $, that's fine, but you will need to increase your R&M costs accordingly. If you start the exterior work immediately, where does this cash come from? You've got about 30 units needing roofs and exterior work. I would at a minimum make this a separate line item to be added to the purchase price to determine your total acquisition cost. As a very simple example, last year I bought the "cat piss condo" for 43K. Rehab estimate was 31K. So, I needed 74K to purchase the unit, not 43K. So, all my numbers were based on a total cost of 74K. Your situation is similar, except your exterior rehab costs are probably proportionately less and you have 30 units to do. You can see this allowance on the BP rental property calculator. These costs should be discrete in my mind because they are CapEx, and not OpEx and will be incurred in a relatively short period of time after purchase, and are non recurring (over the short and mid terms). I hope I answered your question.

@Ed Matson - Very helpful - thank you.  Yes, I already accounted for $200K in additional capital required.  I appreciate your explanation on the management - Didn't know that PM companies can supply on-site managers - I guess that means I provide some kind of work space where they come to work each day, yes?  Basically a front office...

One other follow up question - how do I value this place after improvements? How do you know the GRM for a given market? Is it simply a comps analysis?

@Don Nelson , For rental properties, I always use the actual, not future, CAP rate to value the property. I think of rental properties as assets whose purpose it is to generate income. Without this, they have no value in my book. I also look at the value of the stream of cash flow. These are all standard measures. If you are considering a purchase of 79 units, you would be wise to read up indeed.