What would you offer on this 40 unit

Question

I'm looking at an off market 40 unit. It was purchased by an investor at trustee sale and nothing has been done since. Its empty at the moment.

40 units - 1 and 2 bedroom
$400 average rent = $16k gross potential
Factor a high vacancy as the city is overbuilt with multifamily
$200k in renovation ($5k per unit, pool, roof, landscaping)

Owner is open to financing with large down, I can go cash or combo with owner financing or other investors. Multi cap rates are 8%-10% in this area on retail deals.

Would love to hear what kind of offer you guys would make.

Joel Owens · Answer

The value with anything over 5 units is ultimately tied to the rent it DOES produce or when running the numbers what it WILL produce in a conservative estimate in the future.

You are saying 300k purchase and 200k in renovations.So you are at maybe a 720k value after rehab which is okay but not a great deal.

They key with paying 300 is you have to NAIL EXACTLY the expected rents for fast lease up and the cost to rehab including materials and labor.

Add 10% contingency on top of the written estimates.Your seller is saying 300k but I would venture to guess if you came to them with 250k cash staring at them and you said you would walk they would seriously look at it.

You have to make sure you buy right and are not taking on an overpriced lemon to turn around.

From what you have said you can find better deals.I wouldn't dump 500k cash into something MARGINAL for a deal.

Serge S. · Answer

Thanks everyone - all great replies.

I agree that this is a risky endeavor. Last owner had a $1.2M note in 2005 and obviously could not make it work (not that it matters). Agreed on all fronts that further DD is necessary but I wanted to get to a ballpark offer to see if it would even work. Looks like the owner is into it for $350k so maybe there is not much room to make something happen here.

This is a one factory type town but it is adjacent to a very fast growing city with business and infrastructure coming in.

I say oversupplied units because the town was way overbuilt with 4plex and duplex units 2000-2005. From considering buying one of these type of foreclosures it looks like its not the easiest to find qualified tenants and keep them there. The advantage this complex has is that it has a pool and in AZ this is important. My   competition would not have these amenities.

The building was built in 1972. Units actually look OK. I'd love to offer and buy for $150k but will not happen. Multifamily has recovered in Arizona and 1950s tear down in war zones are selling for $100k+.

My take from initial discussions with the seller is that he may be willing to take a loss but anything under $300k would not happen. My initial thoughts were to be all in at $500k with a target $75-$90k NOI. A decent cash flow play with some built in equity. Clearly the expenses are the key estimate and needs to be dug further into.

Hearing all of your thought process is very helpful.

Mike H. · Answer

I don't you should ever say not to make an offer at all.
Everything works at some number.

Bottom line is that if things are selling at 8 to 10 cap rates, then you know what its value could be worth were you to fix and lease it up. You just need make sure you account for the average vacancy rate there as opposed to some pie in the sky number.

To me, I'd try to work backwards and I'd be sure to be paying for the risk you're taking on.

16k gross with an occupancy of 80% (if thats what the avg is there) gives you 13k. Figure maybe 7k (a little over 50% given the higher vacancy) for expenses which would leave you with 6k per month or 72k per year for NOI.

At 9cap, that would give you a 650k value.

Seems to me a fair price would be about 350k all in (including repairs) or so. You need to have the upside given that you're taking all the risk.
 
Again, I'm just throwing numbers around. You'll have to come up with these based on the property and the level of rehab you're putting in. But if it needs 200k in rehab, your offer to buy should only be around 150k.

They can't expect you to pay at the current 8-10 market cap given thats what fixed up and leased up properties are going for. And this one is neither.

I say run your numbers and come up with what you think the property is going to be worth when its fixed up and leased up. Then figure out your vacancy and expenses to come up with an estimated NOI to get your estimated value.

Then figure in what your risk is worth and make the offer there.

Joel Owens · Answer

1.Need to look at how many foreclosures and short sales are happening for that area for multifamily.The more defaulted properties and saturation of buildings the more rent resets will occur.

This will happen because the new owner will have a much lower basis (Price) into the property once stabilized then the past owner who defaulted. (This will be the case if you purchase right).

2.Is the only reason high vacancy is occurring is over saturation??Meaning is this town a one or two industry kind of town?? If so most of the town could go under  when the plant closes etc.

If it was just overbuilt but the local economy is poised for growth and long term recovery then eventually demand will catch up to supply.

3.Define WHAT KIND of saturation for multifamily is occurring??

You might find 2 beds with no in suite laundry where you have a walk up or that are stacked and do not include utilities paid for the tenant have  a high vacancy.

Some of the other buildings in the area might have low vacancy due to location,rent prices,amenities,etc.

4.200k in reno with 5k per unit is light.Unless these need just carpet and paint,resurface of the parking lot,and updating of mechanicals the cost is likely to be much more than that.

What year was the property built??

The reason I ask is a ticking time bomb that gets most investors is what kind of pipe is running from the water meter to the building or buildings??

If it's clay it is likely broken in places or if it's galvanized it is corroded from the inside and leaking outside underground.To replace just this one pipe depends on the length of run from the street to the building(s) and if certain sections are under one of your roads  or your parking lot.This can cost tens of thousands to a hundred thousand in some cases to fix just to replace the pipe to the building.

So that one item only can add up to another 2,500 per door in rehab costs to a 40 unit.

Another one is EPA cleanup.You would need to look at what properties are around it for possible contamination and get a Phase 1 report completed.

I haven't even gotten into if the building does not have a sprinkler system and the city or county wants one installed to bring up to code.

5.You need to look at down trending of rents.With the foreclosures you want to rehab fast and pick from the most qualified tenants to release up.

So just on basic info you have posted and not knowing anything else.

40 units at 325 rent is 13,000 a month X 12 = 156,000 yearly gross

156,000 minus expenses

7% property management
10% vacancy (your numbers are based off low rent so vacancy upon rehab should be less than going for full market rents)
38% operating and expenses

55% expense= 85,800

156,000 - 85,800 = 70,200 NOI once stabilized (1 year turn around expected for full rehab and rent up depending on what is needed)

Value at a 10 cap is 720,000 before resale costs.

Cost per unit for rehab 10k = 400k
Purchase price = 150k
550k - 720k new value = 170,000 forced equity.

You have to remember the level of rehab needed per unit and the expected rents will play a large factor.This is just an estimate.

I would find someone knowledgable to partner with if you plan to proceed otherwise you will have angry partners who lose money and multiple lawsuits will ensue when it goes bad.

I by no means put an exhaustive analysis here just the basics.

Account Closed · Answer

I agree that deep pocket would be needed.  You will be out time and money as you get the property ready to rent.  You will want to consider that it will take some time to fill all the units and that you would need to make the complex at least as attractive as other rental properties nearby and / or provide rental incentives that lead quality tenants to your property.

If the area is overbuilt you want to determine what the vacancy factor is currently and assess if this oversupply is likely to be a long term problem.  No way to forecast potential future cash flows with out an idea of what your vacancy factor might be.

I would also consider your level of experience.  If you have solid experience with other apartment complexes this might workout for you.  Without that experience you may find that this turns into a huge money pit.

Dale Osborn · Answer

Not sure that you want to make an offfer at all. Building is vacant, needs repairs, high vacancy for the city, and you would need deep pockets to do something like this.

What would you offer on this 40 unit

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