16 Unit Evaluation - Cashflow w/ 100% financing?

17 Replies

BP Community,

I am seeking information and guidance from the wealth of experience we have available here. I am fairly new to the real estate investing game and am constantly trying to learn more. Here is where I need some input.

I have come across a pair of 8-plex’s that, on the surface, appear like a good opportunity. I am here to reach out in hopes of gathering more information, input, and advice when evaluating these units. I believe I have covered the basics in my initial evaluation but want to make sure I look at everything that’s pertinent for this type of property. I could also use direction on the financing side since this will have to be a commercial loan. I think that the cash flow may still work with a commercial loan and a second to take it to 100% (if it’s even possible).

The basic property information is below.

16 units (2br/1ba) - $758,000 ($379k x 2) (List price)

Rent - $9,600-$10,400 ($600-650 estimated based on comps)

Tax - <$2,000/yr

Utilities – Appear to be metered separately based on pictures

Lawn Maint. - $50/mo (little yard/landscaping)

Insurance - ??? Calculated based on $600/month (I assume this is very high)

Vacancy – 5%

Repairs/Maint – 10%

Cap. Ex. – 10%

Mgt. Fee – 10%

The property was purchased in 2015 for $150k and appears to have been renovated recently. There are only pictures of one unit and the floors, counters, etc are updated.

What are some things I may be overlooking or other areas where I might be surprised? Does anyone have any advice on financing for something like this?

I look forward to the input!

Regards,

Scott Hensley

@Scott Hensley

What market is the property located in and what type of asset (C or D)? What are similar assets in the market trading for? What value adds can you implement, increase rents, additional revenue, etc.

Taxes appear very low, get a preliminary quote from an insurance company, make sure about the utilities.

this is for starters

Gino

@Gino Barbaro  

The property is in a C class area.  It is tough to find comps in the area but what I have found are at around $40k-$45k per unit.  Unfortunately it appears that most of the value add opportunity was taken by the current owner, that being said, I have only see the outside and pictures of one unit.  I checked the taxes on the county website and they are under $2k but will definitely check the utilities further and look into an insurance quote.

The current owner bought it for 150k in 2015 and is now asking for 758k. That is quite a jump even in this market. Try to see how much of that is actually in the property as retained value for you. Regardless  I’d check this property and location with a fine tooth comb. The numbers seem OK on the surface-best of luck!

@Scott Hensley

75% loan to value is normal for loans in my realm and the max cltv is 80%.  No one is going to do 100%.  If they do, please have them call me:)

Your swing in value for the property,unless significant improvements have been made, will raise eyebrows as well.  Everything else looks reasonable although you should calculate your gross rents at about 75% to account for vacancy loss.

Stephanie

@Bjorn Ahlblad

Good catch, I misspoke regarding the original purchase price. Each building was purchased for $150k totaling $300k for the 16 units. I do believe the current asking price is high but that can always be worked on.

A few quick things I saw - 

The property taxes are based on the value of 300k, so they should more than double, assuming taxes scale linearly.

Talk to lenders in the area, they will give you the assumed vacancy rate. I always put 10% down to be conservative.

Do you have utilities for common areas (e.g., laundry, outside lights, hallways)?

@Mark Costa

I did look at taxes and for both units will be under $2000 annually. I will definitely check with some other sources to verify the vacancy rate.

I did not consider costs for outside lighting. There are no community laundry or hallways to maintain but may be a few outside lights that do not fall on the city or tenants. Definitely something to look at even thought the cost should be minor.

Thanks for the input.

+1 on double checking property taxes in your local market. Some markets can only increase a fixed percentage per year, others have no limit. This can make or break a deal sometimes.

I also didn't see anything for "other income". Are there laundry machines on the property? Could you possibly charge for parking, pet fees, billing back utilities if not separately metered, or other things?

@Scott Hensley There are many factors that you should consider when looking at this multi-family property:

- What is the the current economic occupancy? Ex: 15 units maybe under lease, but only 10 of the units are collecting money. Check the rent rolls of the property. 

- What is this historic occupancy rate for this sub market? Where is it at compared to the current cycle.  Ex: Say the historic occupancy is 90% and you have it currently at 95%, you could conservatively underwrite the property at the historic rate instead of at the current market.

- What is the debt service on the property? Should be at least 1.25 or higher. The DCSR of 1.25 implies that for every dollar loaned, there will be $1.25 generated by the property (+.25 cushion).  

- How does job growth look in the area? Are people coming or going? Compare this to the national average. 

- How is the location of the property? Is it in a good area? Is there crime? What do the school systems look like? What is the current walk score?

These are a couple of things you can look further into. If you're going to get financing, the more information you present  the lender, the better.

 Best of luck:)

@Scott Hensley I completely agree with @Matthew Baltzell In order to determine whether purchasing this property makes sense, you have to complete the underwriting for it. You also have to do your due diligence on unemployment rates, population growth, job market, property specific location - is it strategically good location, and ALWAYS, ALWAYS when purchasing the property analyze how easy will it be to sell it for profit? what are the value add components? how much the property will be valued for after the value add components? Also if as you said if there is no value add is it still worth pursuing?! 

These are some of the questions for you to answer to determine whether to move forward.

@Matthew Baltzell @Alina Trigub

Thank you both for the insight.  I certainly have some more information to gather and look at with this property.  One big concern I have is covering the down payment as I don't want to tie up too much of my cash.  I will definitely be looking for some creative ways to finance it if all the numbers work out.

I don’t see water, sewer, garbage cost? Assuming you pay for them. There is usually a house meter for electric. $50/month to mow? Maybe a week. Taxes will definitely go up after the purchase. 100% financing is possible if you have 25% equity somewhere else, but you will need 1.25 debt coverage.
Hope it all works out.

Yes, check the taxes based on what you will purchase it for, and double check any common utilities.  

I estimate about $1075 of cash flow monthly, based on our number but $333 per month for insurance.  That is ~$67 per unit per month, if my math is right (please check it).  Is that what you are looking for in cash flow per unit?