Too good to be true. What am I not seeing?

14 Replies

Hi everyone, 

I've been saving up funds to make my first multifamily purchase soon, so I've been doing a lot of research about underwriting and different markets around the country. I came across this listing in St.Petersburg, FL that has me a bit confused. I would really appreciate it if you could take a look at it and let me know if I'm missing something. Here is the OM: 2nd St Suites

The OM is saying they are selling at a 10.26% Cap with a CoC ROI of 26%. I know ROI will depend on how much you're putting down, but this cap rate seems oddly high given that cap rates in that area seem be around 6-8%. Is there something about this property that makes it undesirable? It's very old, but was renovated in 2014. Vacancy is low at 5%. It has 11 studio units at 200sqft which I think is tiny, but apparently they are renting well. So what am I missing!?

Thanks for your time :]

@Pratik P. I don’t seen anything that immediately sticks out on that OM, but you are right to be concerned. Why would anyone sell almost half of what the property is worth? Just keep both eyes open for what they are not telling you as you get into it.

If 11/19 units have no private bath, then this is a rooming house, not a MF apartment house. Much more management intensive. Lower quality/higher risk tenants. 

The op expense is 40%. My guess is it doesn’t include professional management which will be required for an out of state investor. Is there a local management company who can/will handle this type of property?

@Kent Ritter  @Manny Cirino @Ed Matson I completely overlooked the fact that it's not a true 19 unit and that it's rented by rooms!! I was wondering how there could be 200sqft studios lol. Definitely a turn off for me... Thank you for catching that!  It does look like they included management fees in the operating expenses but not sure if it's a professional management company.

Expenses are low. Maintenance is way too low, especially for a rental by the room. Contract services and management are way low. 

Also, income looks generic. They use 5% vacancy as the actual vacancy, which is odd to have a perfect number like that. 

Originally posted by @Pratik P. :

@Manny Cirino No I'm not, I'm in Sacramento, CA.

@Todd Dexheimer Looks like repairs and maintenance is 4.5% of the income. What do you think is a more realistic figure? Same with contract services. 

$1000+/unit ($19,000+) for R&M and unit turns. Contract services should be double. Management will cost around 6-8%, plus you will have leasing fees and renewal fees, so add in another 2%. 

I’ve seen some other properties like that in St Pete, and I think those numbers were a little optimistic as well.

Like other mentioned here that’s not a true multifamily but a boarding house, so your tenant base would be that demographic.

Also these older properties in St Pete cost more to run and insure, along with deferred maintenance being common on some larger items like sewer lines.

That’s a great area so you might be better off changing that layout inside to a bunch of 1/1s. The property appraiser shows 24 fixtures so you should be able to convert it to 8 units. It is currently zoned as a 5-9 unit apartment so maybe at some point it was that?

Originally posted by @Brandon M. :

That’s a great area so you might be better off changing that layout inside to a bunch of 1/1s. The property appraiser shows 24 fixtures so you should be able to convert it to 8 units. It is currently zoned as a 5-9 unit apartment so maybe at some point it was that?

That would probably be the best way to go to minimize management cost/effort. What do you mean by 24 fixtures?

@Pratik P. - Pinellas County shows the number of fixtures on the house but not bedrooms, so you can tell how many bathrooms a house has from the property appraiser. A full bath has 3 fixtures, a toilet, a sink, and a shower/tub, and a half bath only has 2 fixtures, toilet and sink. So if the property appraiser shows 6 fixtures you can assume the house has 2 full baths, whereas 5 fixtures would be 1.5 baths.

Originally posted by @Brandon M. :

@Pratik P. - Pinellas County shows the number of fixtures on the house but not bedrooms, so you can tell how many bathrooms a house has from the property appraiser. A full bath has 3 fixtures, a toilet, a sink, and a shower/tub, and a half bath only has 2 fixtures, toilet and sink. So if the property appraiser shows 6 fixtures you can assume the house has 2 full baths, whereas 5 fixtures would be 1.5 baths.

Ahhh gotcha. Ok thanks for pointing that out