Deal Analysis: 22 Unit multi-family

20 Replies

Good evening guys and gals,

I have a deal under verbal agreement at the moment until all the details are hammered out and I need some of your thoughts on it. This would be my first multifamily deal

Details of the property below;

  • Number of Buildings: 11 buildings, plus 5 empty lots (potentially build more units in the future)
  • Number of Units: 22 units
  • Agreed Purchase Price: $132,000 CASH
  • Repair Cost: $120,000 - $140,000  (**contractor priced repairs of each unit at $10,000-$11,000 per building - includes labor and materials**)
  • Current Rent per Unit: $350/unit
  • Gross Scheduled Monthly Rent: $7,700
  • Gross Scheduled Yearly Rental Income: $92,400
  • Current Vacancy: 87% (Only 3 of the 22 units currently occupied)

  • After Repairs
  • Rent per Unit: $425 - $450
  • Gross Scheduled Rent Income: $112,200
  • Operating Expenses: $33,660 (garbage $2,000/year, electrical cost $200/year, water and gas on individual meters)
  • Net Operating Income: $78,540
  • Cap Rate: 9%
  • **part of the repairs would be to convert all units from gas to all electric. 

Plan and Exit-Strategy

Plan is to finance the property with a hard-money loan (purchase and repairs). Value of property after repairs and 95% occupancy will be roughly $872,000. Exit Strategy would be Cash Out Refinance the property 12 months from purchase date.

Please offer any thoughts or advice or questions on this deal that would help me. I have attached pictures as well so you can see the condition. 

      @Harrison Ojimma from the looks of the property in the pictures and your comment about converting to electric you will likely spend $30k or more per unit to get this property in to shape. 

      Also your operating expenses will be double what you are estimating ton a property like this. You need to factor taxes, insurance, repairs, maintenance, vacancy, bad debt, CapX reserves, etc. Lower income properties like this generally run 55% or more operating costs.


      $272,000 "all in" for purchase and rehab.  Add $5000 or so for closing and holding time.  Total: $278,000.  Barely $12,000 each for fully rehabbed units.  That's seem very low.  Are you sure on the numbers?  Why so cheap?  Even high vacancy rate shouldn't result in owner giving it away.

      Rent after rehabbed max of $9,900/month.

      If I did my math correctly, that would put you at a 3.5 Rent to Purchase Price Ratio. That blows the "2% Rule" out of the water. Also, CAP Rate is Yearly NOI / "All In" Capital. In this case: $78,540/$278,000 = 28%. How are your calculations showing 9%? Anything over 10 in today's market is good. 28 would be amazing.

      Even with paying out for garbage and common area utilities, that amount of cash flow sounds insanely high.  Are you 100% sure on the numbers?  If yes, then unless these units are located in the armpit of nowhere and no amount of improvement will help with the vacancy rates, this is a steal and you should already have it locked up under contract.

      I would get 3 or 4 MORE estimates. I paid 6k just to rip out a shower and install a vinyl slip in. $150 for a plumber to swap out a faucet or toilet. 1200 to re-varnish hardwood floors in 3 rooms. 1k-1300 to repaint 5 room apartments (3BR).  I would talk to the lawyer and see what precautions you can take to protect yourself on the contractor's estimate. Explain to him that you are buying this deal on the basis that he can convert these apartments into rentals!  

      Area looks very rural, can this town support these new vacancies? Who's going to manage this property? If you fine; if not are there multiple PM in that area?

      I personally would not do a vacant property as my first deal unless I was the contractor. I could research the hell out of apartment supply/demand in that area to feel confident if my vacancy rate is accurate. Rehab is my big fear, always was, always will be. 

      @Greg Dickerson thank you so much for taking the time to respond. You're absolutely right that the operating expenses could reach as high as 60%. It'll also be a lengthy process to get these properties renovated. 12-15 months even. Thanks again

      So to you. This would be a NO DEAL?....what about renegotiating price down, would you consider it then?

      @Gaspare U. Thank you for taking the time to read and respond. I'm about an hour from the apartments. I would hire a property manager. And you're right, I need 3 more contractor estimates. The rehab is a big area of concern because of all the unknowns once things get started.

      What's the most important thing you consider when first doing due diligence on a multifamily property?

      Originally posted by @Harrison Ojimma :

      @Greg Dickerson thank you so much for taking the time to respond. You're absolutely right that the operating expenses could reach as high as 60%. It'll also be a lengthy process to get these properties renovated. 12-15 months even. Thanks again

      So to you. This would be a NO DEAL?....what about renegotiating price down, would you consider it then?

       I’m not sure you would want to do this deal even if he gave you the property for nothing. You need to run the numbers and make sure you can fill the unit.

      Originally posted by @Harrison Ojimma :

      @Gaspare U. What's the most important thing you consider when first doing due diligence on a multifamily property?

      I like to look at the T12 (the ongoing money that's going in and out for the last 12 months) but since this place is practically abandoned that's not going to help.

      I would get more contractors in there. And get a price on the repairs to get this place rentable. While those estimates are getting worked on I would look at the area. 

      Get a 5 year outlook on Employment, Population, Industry makeup, Age Group, various other factors. ((btw I'm reading this book: Best Ever Apartment Syndication Book and i actually just went over this chapter on my commute in to work!)) @TheoHicks nice work guys!!

       

      It looks to me like your contractor missed the memo on wanting to convert the units or he isn't sure what that really entails.  Going from photos, this will be more than what he quoted in repairs unless the interiors are in pretty good shape?  I see it says 11 buildings and I also see 11 roofs that will likely need replacement judging by the photos (get a roof guy out there).  I agree that to get these occupied is going to be a tough job and your management company you choose may or may not really help out much if these are rural to their usual market area (you said you live an hour away, so either these are in the sticks or you are).

      It's a lot to bite off for sure.

      All I need to see is the after repair rent to know I would pass as a rental.  Maybe my standards are too high but at that rent point, the max cash flow ceiling per unit is very low.  

      You can tell from the price being discussed that it is a zero appreciation market (meaning historically it appreciated no faster than inflation).  This implies that after rehab, you have a declining value asset (due to aging rehab).

      But mostly it is the rent.  If I modify the 50% rule to 60% costs  for such low rent values (hopefully being conservative - I try to always be conservative when doing projections), that leaves $160 to $180 to cover mortgage service and my cash flow.  

      BTW: $872k (ARV) @ 75% LTV, 4.875% at 30 year term = $5,129 = $233/unit.

      So after the above refi, you would have negative projected cash flow $50 to $70 per unit.  

      If you could actually get $872K, I would flip it. $872K - $272K = $600K - 10% selling costs - holding costs (fairly small due to low price of acquisition).   Using your numbers I can see this producing $400K+.  I think that you are unlikely to hit all your numbers but even $300k+ would be a very good return.

      As a BRRRR, No thanks. As a flip, yes. Good luck if you proceed.

      Anything that rents for $400s is going to be a nightmare. People think they cashflow on these but real life expenses will eat that away and likely low quality tenants. I'd pass!

      Curious if you know much about the history of the property and how it got to this point? What can or would you be able to do to avoid the same fate if you did actually take on this project?

      It seems like the estimated rehab costs are pretty low. I would always caution on the high end for all of the repairs, or if it was quoted by your contractor, be sure to get it in writing. If that is the deal, looks good to me!

      Harrison,
      From an Insurance Standpoint, you should discuss with an independent agent who has multiple markets for Apartment buildings. Some likely issues could be:
      - is there lead (should get lead free cert)
      - is there asbestos
      - condition of roofs
      - past loss history
      - condition of the roads, sidewalks, drive ways, etc.
      - overhanging limbs
      - Fire fighting response time/amount of water that they can bring to the site

      There may be other state specific issues.

      You want to know what will need to be repaired, replaced, upgraded, etc. because that is all generally cheaper to do upfront.

      Originally posted by @Jill F. :

      @Harrison Ojimma Do you know why they are mostly empty? Is this property on well/septic instead of city water/sewer?

      The owner just neglected them. Poor management...he never hired a property management company to oversee the property. Its is on city water and sewer 

       

      BTW: $872k (ARV) @ 75% LTV, 4.875% at 30 year term = $5,129 = $233/unit.

      @Dan Heuschele

      I think he was planning to only cash out what he put in, which was about 250k 

      250k, 4.875% at 30 year term = 1,323 = $60/ unit

      Also, I think your math is off but I could be mistaken..

      You might want to try a master lease which doesn't lock you into anything beyond 4 or 5 years and allows you to have option and first right of refusal to purchase. Also allows you to put less money up upfront and allows you to use majority of funds to turn properties over quicker. I hope you calculated landscaping in your numbers. It plays a big factor into the type of people that want to live in the community.  Also you should have a target market of renters that you know would be interested in renting your units; college students, factory workers, hospital staff etc.

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