16 Unit MF Houston Deal Advice

[Khizar Hanif]

Hey everyone, 

MF acquisition here in Houston. Very hard to find something these days without having to overpay. I am a syndicator, but this particular deal is just for myself and a partner 50/50.

It's a 16 unit in a decent area that is worth considering. Curious to know your thoughts. 

• Asking price 1.1M
• 16 Units
• 6.49 cap (according to their expenses, which are low. They are showing 28% but I am underwriting at 40%, will be managing on our own).
• Occupancy 93%
• 6/16 units rehabbed
• Entire exterior of building refaced/upgraded

Current owners are investors, they bought the property 6 months ago from mom and pop (which is what I would have wanted to do). So they are capitalizing on the value add appreciation, which kind of burns me to even consider this deal. BUT, it is in a decent area, monorail right next to complex which tenants use, would be a stable property. Some new construction homes right behind the property, school right across the street, land value increasing in the area, etc. 

There is some potential for us to increase rents $50 and rehab the remaining 10 units. Might be solid for a buy and hold. Some specifics...

• Average rents currently $573
• Income $9175/month and 110,100/year
• Taking 10% vacancy loss brings income to $99,090
• Expenses stated at $28,000
• NOI $71,000
• 6.49 cap asking 1.1M
• Underwriting at expenses being 40%:
• NOI $59,454
• Cap rate 6.49
• Valuation $916,086

Some upside if we rehab units and raise rents...

Thinking about an offer of 950k with a 985 ceiling. Should be a 9-10% cash on cash with DSCR above 1.3...

Any thoughts on this would be appreciated!

[Jaysen Medhurst]

@Khizar Hanif, is 6.5% a reasonable cap rate for this asset class in Houston? You should definitely include management in your underwriting. The bank will...

• What was the selling price 6 months ago?
• Is there some distress? Why are they trying to sell so quickly?
• How much will you have to put in to complete the unit upgrades?
• $50/unit rent increase isn't that much. Is that for renovated units as well? 
• Your underwriting (40% expenses) gives a $916k valuation. Why would you offer $950k?

At first blush, looks like you're trying to talk yourself into this deal. I certainly don't know your market, but I'm not seeing it.