THOUGHTS ON THIS 10 UNIT AND NUMBERS

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Hello BP Nation,

I would like your thoughts on this please.

I took a look at a 10 unit for the first time. It's a brick building built around 1920. It has been rehabbed some time ago has sheet rocked walls, breakers, carpet, etc likely completed in the very early 90's. Needs some work to 3 of the vacant apartments. right now rents are 4500 per month fully rented 6500K per the owner this is accurate. 5 units are 2 bed rooms, the other 5 are 3 bedrooms. Rents are a little low from 650 to 750. Outside needs some brick work in a few places (pointed up).

Tenants pay own heat and electric ( forced hot air) Flat tarred roof. The cashflow is low for me at 1300 or so. Good connection with the owner wants to sell to to do other things, no time, tired etc. Mention a few times knows it needs work would like to get 350-400K, however I would not pay 350K. High taxes and water/sewer. The numbers look great, however I don't really like the overall numbers. 

Am I missing something?

Thanks!

 input by the member who posted.

@Henry R. , I think this looks pretty good, assuming there isn't a lot of deferred maintenance or CapEx items that need immediate attention.

That being said, there will be something that needs attending to and I think your $3k for initial repairs is optimistic. I'd figure $15-25k at the very least to get the 3 vacant units rentable, attend to the pointing, and miscellaneous repairs.

The Cash-on-Cash return is great as it stands. If you can bump rents by $100 that would be great. I think you need to adjust some of your numbers, though:

  1. Vacancy might be a touch high, but this is super local.
  2. I feel better with Repairs and CapEx at 7.5% each.
  3. The taxes are very high. Have you confirmed them with the town? What's the town's appraisal? Is there any room to challenge?
  4. Is there anyway to charge back the water and sewer? This would really make your return shine and add $50k+ of value right out of the gate.
  5. You should expect at least $4-5k in closing costs.
  6. The loan terms you cite are unlikely. For commercial loans, I'm being quoted 20-yr at 5.5%. You might be able to find a 25-yr at ~6%. Call around to your local banks. This will bump your monthly P&I by ~$340.

@Jaysen Medhurst Thanks so much for the response. We have a 3 unit with a commercial loan because it's in a LLC at 5% it's a 5 year balloon however they have already told us most do not pay it off and we can refi that is why I used the 5%, I realize this could change. I will raise the repairs and capex on the 10 unit that is a good idea. Thanks

I called to day about challenging  the taxes I have to fill out a form and get it in buy  the last week in May. The town assessment is always normally high in this city. 

I'm going to call renters rights to find out if charging the tenants for water is legal in this city. As far as the repairs goes for the 3 apartments, they need mostly cosmetics however one will need more work in the bath room so I figured 7-8k each. I just put a number in there like @Brandon Turner does just to get some idea what I was looking at however you are correct it will be much more than 3k.

When I called the owner today he all of the sudden wanted me to give him a price by Friday, when I asked why the rush all of the sudden he just said he'd like to get it done? Not sure if he understands this kind of investment takes time

Any thoughts on this? His sudden rush?

Thanks again.

@Henry R. , the owner may just be impatient or think that you’re taking your time means you’re having second thoughts. Who know?

No reason you can’t give him a number on Friday. It’s not binding until it’s in a contact and you should have clauses around due diligence, etc. in there.

@Jaysen Medhurst I spoke to a mortgage broker who needs to view the property, so I called the owner and explained needed another walk through with the broker. Thanks for the added advise, I plan on doing inspections as it moves along.

Thanks!

@Henry R.  

You can probably get a commercial loan w. 80% ltv! I get them through US Bank, but they're not present on the east coast. Wells Fargo will definitely do it for you. 25 year am though and I couldn't tell you their rates now. I'm getting 5.25 on smaller loans like this. 

Repairs and Cap Ex of 10% look good if the property is in good condition.  I've seen conservative banks will run debt coverage at 20% often times.. not that you'll have a debt coverage issue with this property. Whenever I take over someone else's building, esp working class (which I would assume this is by the cap rate), I like to estimate first year expenses of 20-25 as well for maint/repair/capex... but I would vary it based on the age of each component and the cosmetic condition of all units w special attention paid to kitchens and bathrooms. 

Insurance looks a tiny bit low for replacement cost and general liability on a 10 unit. I know most carriers won't underwrite a policy on a property of this size & value based on its property value of 300k, but rather the much higher replacement cost which I'm guessing would come in at around 700-800k. My guess on insurance would be mid 200's-ish.

Numbers look pretty good! Solid cap rate out the gates if you've got a property in good condition. Especially if you've got a clear path to raise rents and end up around a 12 cap.

@Elliott Elkhoury , Yes the local Credit union gave me a 80% LTV on the current property we have in a LLC. I'm checking with the agent again as the quote he gave me was for the cost I have in the analysis. Most of the work needed is for the 3 vacant units likely 6-8K each. yes working class neighborhood, and the rents are low at least by $50-75 each unit and that is me being a little conservative. Out of the 10 units, 5 are 3 bedrooms, and the other 5 are 2 bedrooms. The taxes are way high at 14600! And the water/sewer bill at 5400, I've been told to do a RUB, but it would be easier I believe to raise the rents to cover more of that cost, than to do the RUB, tenants will not like that less problems if just included in the rent in my opinion. plus my wife likes this better too,enough said...lol!!

 The building is in good shape overall will need some pointing up in a few spots, nothing that is considered bad at this point, I will be doing an inspection if we get that far, time will tell,  Thanks for the tip on the insurance!

Thanks for reading Elliott!

@Henry R.

So is the $6500/mo based on current rents, or proforma (after raising $50-$75 up to market)?

If it’s based on current actúals, then I think you have a deal on your hands! Getting gross monthly rents up to $7500ish would get you up around $2k/mo cashflow, which is awesome.

I agree with what has been said about your initial numbers - I’d budget for a higher capex/repair budget (15% probably sufficient). Vacancy allowance seems a bit high.

Good luck getting those taxes down, that would save you a ton.

Looks like a solid deal to me assuming your numbers are correct!  I would suggest calling a local property manager to see what repairs run for a similar property.  I think 5% is pretty aggressive, however we normally do 300/unit/year for capex so you may be covered.

Try to see if you can billback for city water/sewer and about lowering your taxes by filing an appeal.  The only other things I noticed is you should conservatively put at minimum $15,000 aside for fixing up the 3 vacant units and other miscellaneous improvements and your closing costs are likely to be around 4% or higher for this.  Check with your lender and they can give you a ball park estimate.

@Henry R. oh there are vacant units- that's an interesting detail. is the income reported current income, or pro forma income of a fully occupied property? 

Sounds like you've got this one under control Henry! 

Breath of fresh air. Sometimes I feel like I'm ripping stuck kittens out of trees here on BP with all of the "analyze my deal" posts that are just nightmares waiting to happen. Phew.

@Taylor Chiu the 6500 is based on when the unit is fully rented. I only used this number to see what the property did at full but lower rents. currently 3 units are vacant current rents are $4500. The capx and is now at 7% repairs at 7%. Getting taxes lowered is not likely but will still try. Just being conservative on the vacancy.

Thanks for reading and your comments!

@Chase Louderback I keep running the numbers as I find out more information. Right now the rents are at least $50-75 low. Fully rented it's 6500 at the current rents and $4500 because 3 units are empty. As far as the RUB I will likely raise the rents to cover more of the water/sewer bill and I need to check this with the city. I figured 6-8k for the 3 units was a good ball park from what I saw.

Thanks for reading and your help!

@Elliott Elkhoury   yes that was in my top post so current rents are $4500. As I get very good help from you and all of the others on BP I keep re-analyzing the property as I should. I don't know if I have it under control LOL, I have some concerns for sure. The 3 unit rehab we did was so much easier as I look back on it, however very good experience. 

Thanks for the kind words I have a long long way to go.

@Jaysen Medhurst , Good morning, an update. I spoke to the owner of the 10 unit and he pressed me for a number and while I did not have all of his numbers and advised him of this he kept pressing. So his low number was 350K, I went lower and he had such a long pause I thought he hung up, lol! Anyway he didn't said we could meet the following week( he said he was too busy the previous weekend). He told me he would call later in the week, he didn't I text to ask what his plans where and I never heard back from him. So I believe I messed up the deal looking back on it I should have just told him around 350K, however at the time being caught off guard a little I didn't want to have him believe I would pay more without knowing his rents, the cost for the 3 vacant apartments that needs work to make rent ready, etc. Plus the other deferred maintenance some brick pointing,etc.

I told the money broker the same, and he asked for his info. He's contacting him, but I don't know why exactly?

Now back to looking at 2 and 3 units. I feel like after all this time I'm not getting anywhere.  As you know to have properties cashflow you have to buy them right and the few other offers we made were rejected. I know this happens I need to find more to make more offers, but this is not easy to do.

Thank for reading.

@Henry R. , it's all about persistence. Don't sweat this. If you don't get it at a number that works, it's no deal, so you haven't missed out on anything. The owner's a dope if he thinks you're going to offer him the world without all the necessary info.

I wouldn't be surprised if you hear back from him in a few weeks / months. He'll have some BS story about why he didn't get back to you, then start feeling you out. Make sure you're clear on your max price and let him do the talking.

If it makes you feel any better, I've been negotiating on a FSBO 5-unit that the guy has way over improved. He's trying to sell at a 7% CapRate in a 12% area. At his price the place will cash flow $9/month...the whole property. He's emotionally attached and doesn't want to hear how commercial properties are actually valued. I've made my interest very clear and touch base with him every few weeks. We'll see what happens...

How much lower did you go? If you said 250k, there's probably no meeting in the middle.  If you had said something like $315k, however, you could likely call back and say you have ran your numbers again and are willing to go... $X.  

(I don't know what that X is for you.) 

Does the deal work for you at $330k? $340k?

@Jaysen Medhurst @Tim

Thanks so much for the advise and your experience. It helps a lot when you start thinking you blew it. Tim at 340k it would not work with the current status of the building. More like 310 or so.

Jayden you are right he very well may call me in a couple of months that would be interesting!

Thanks fellas!