Deal Analysis.

Multi-Family and Apartment Investing Forums 34.4K Posts 3.9K Discussions

Hi everyone. I'm new to BP and new to REI in general. I'm looking to do my first deal and currently have an offer in a 6-unit multi-family house. Seller asking $140k with gross profit of $31k and net with $19k(w/o depreciation). Over the last 17 years he has owned the property all years have been profitable with the average being $11k a year in net profit. From investigating on my own the seller bought the place for $58k. It has a roof that is 6 years old and a new boiler. But the appliances (range/fridge) will likely need to be updated shortly in all units (look from the 70s). Houses in the area are selling for around 60-80k. My feeling is the house is worth in the 105-110 range not 140, although I know there is huge cashflow potential. I would be doing traditional financing on the property which would not be a problem given my current job, affordability wise.

Do I seem way off on my eval at 105-110? or is his 140 offer fair? The seller is in his 80s and owned 6 properties and this is the last of his 6 to sell as he wants out of the business.

Thanks everyone!

He may be motivated to sell. Justify your offer with him showing comps and depreciation based on age. In fainess, make sure you show him the improvements he has made. When talking about income and the valuation, I usually point out that a buyer doesn't buy tenants, they have to buy the property, the tenants might hate me and love you, so I can't pay for them beyond the lease they have.

With that, it's always eaiser going up when making offers than going down! What's it worth to you? Good luck

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Great advice Bill G.

"What's it worth to you?"

Medium logo 03Ben Leybovich, JustAskBenWhy.com | [email protected] | 1.888.508.9643 | http://www.JustAskBenWhy.com | Podcast Guest on Show #14

Kurt, sorry I missed it being your first post, welcome to BP!

If you want us to value the deal, we need to know what you expect, 11K at 10% is 110K but what contributions do you need to make that, you don't get 100% financing.

Here is something to consider with retiring landlords, if they are in good health, seller finance it or much of it. They don't pay the government of the gain, that's paid as it's received, most likely they can't invest the proceeds at a higher rate and the collateral they get is the best there is, after all they know the property. They could pull in close to what they worked so hard for by simply going to the mail box. Just a thought.

Do you have expenses on it, who covers utilities, comps in line and like kind? You can't comp a 6 unit apt to a single family home, unless you want to convert it and figure conversion costs. You need the expenses, faur market rents you'll be getting, figure in your cost of money and debt service, to see where you'll be.

But, sounded like you have had investments and know what you want on your money. will there be any appreciation in this area and property or is it pretty well matured out, on the down slide and cash flow will be pretty much it? What do you expect after taxes?

All that said, yes, sorry but I don't know the area, property,comps, rents, expenses or your requirements so it does come down to what's it worth to you?

You can't value a deal on what the old owner is clearing, he didn't pay 110k for it! Good luck... :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

utility expenses paid by owner are about 5k per year but that was included in the 19k profit number and the 11k profit on average over the 17 years of ownership.

I just think it's tempting to pay near full price because of the cashflow however I think the building/grounds itself isn't worth more than 110k max given the area. I didn't know if the cashflow was reason enough to pay the higher price was all.

58,250(his buying price) with 3% appreciation over 17 years is 102k

and 11k net is 110,000 at 10% cap.

Thats how I was arriving at a number around 105k. This being my first deal I wasn't sure if that was the correct thinking.

Thanks for the quick reply and good luck wishes

Is 10 Cap the market Cap for this age property? I would guess not. 11k noi on a 140,000 purchase would be an 8 Cap. This is a 8% coc without financing. Getting a 75% ltv loan at say 4% will gets you a 14% coc return after debt service and you still have 105k to look for another deal.

"I think the building/grounds itself isn't worth more than 110k max given the area."

The building and the land is worth the income it produces. This not single family. This is commercial. What he paid doesn't matter either. i know properties that have increased in value over 100% in two years. Has the bulding and land increased in value, no, but the business that you are buying that use that land and that building is what is important.

It never hurts to try to get a lower price and owner financing. You need to verify all of the expenses. What is he leaving out. Is he self managing and are you going to.

Get a break down of all of the rev and expenses. Taxes: what are you taxes going to be after sale. Insurance: what is his coverage, Repairs and Maint: are your costs going to be in line with his or is cousin Bob doing the maint on the cheap. General admin: not much in the small props, but it costs for the evictions, accounting, legal. Marketing, Property Management. Contract Services: Pest control, Lawn Sometimes seller slip and leave expense out. Check out the numbers.

What is important to you? Cash on Cash return or cash flow. What numbers are you looking for?

Medium sig  3 Jeff Greenberg MBA, Synergetic Investment Group, LLC | [email protected] | 805.372.1799 | http://www.synergeticig.com

Thanks for the reply Jeff. I obtained a copy of his schedule E from last year for the expenses breakdown and he runs it himself. He is also willing to give me a list of handymen he has come to trust over the years. And also said he would be willing to help me with anything down the road. I live in a smaller town so I want to be fair and establish a good relationship/reputation in the area.

I'm getting a picture of the seller here. I did alot of business with older landlords and turned them into note holders.

Go through the numbers and get all the expenses taken care of, put in a 10% vacancy. Look at market rents and see what the income is before debt service and taxes. That's what you have to play with, determine what you need for management before taxes and an amount as profit for the brain damage. Take the amount allowed for debt service and put that in your calculator as the pmt, plug in 180 months for the term, look at it at 6% and plug that in, then compute for the present value. Is that close to a valid offer? If it's low, start adding to the term to raise the PV, if it's high, shorten the term.

What you are selling is the idea of an annuity income in exchange for the property. I've done many at 100% LTV by selling the financing instead of buying the property so to speak.

Retirees want income, low taxes, no headaches or worries, no more maintenance, repairs, tax return complications, cleaning, advertising, tenant collections and issues. Provide the highest income you can to them at a rate higher than they can get in CDs or other simple investments and you'll get thier attention. In reality, an 80 year old, while they do care, they will view what they will be getting over the next ten years at a higher payment more favorably than a smaller income for thirty years. We aren't talking big money here, but a hundred dollars more is always better.

Try for a fully amortized note, try hard not to go with a balloon less than ten years.

Another aspect of doing business with elderly seller, make sure you ask the seller how the deal will fit the needs of his family!!!!!!

Very important IMO and past experiences. (Especially in a small town). I assure you, that if you get a steal of a deal or even a decent deal and that seller has some kids that don't agree.....well, I've seen deals recinded by a judge a year later! All an elderly person needs to do is say to a judge something like.....no, I didn't really understand all of that, he seemed like a nice man and he told me so much I thought everything was okay. You usually lose, after all he wasn't represented, he didn't draft the contracts and he acted without the knowledge of his family. Anyway, in getting the family involved or aware, make sure you don't make it appear that you need the family's approval for the deal, that will insult the owner as not being in charge of his own affairs.

Best approach is to ask about family, what the kids do now, just be friendly and ask what they think of him selling the place. Are you sure they don't want it? Just get a good feel for the deal and see how the seller reacts. If the seller is open to having the family there, I encourage them to do so, I have faired well when I showed an interest them and the family.

With seller financing, I have also set the note and security agreement up with contingent beneficiaries, you can name the kids as a POD or to a trust. This has two affects in the deal, one it demonstrates that you are trying to cover thier concerns of security, but also, it complicates the marketability of the note, keeping the note in play while the seller still walks the earth. This is a benefit to you but also to the seller if they are thin on other assets. If they really need to sell the note, it can always be modified and sold with your signature.

The market value of a note can cloud the qualification process for people needing medical assistance, it's based on the market value of the asset, so if the asset is not marketable, the value may be dismissed entirely by law.

Play it by ear, some old pharts are hard nosed, but if this seller is offering assistance after the deal, he loves his property and hates to sell the memories. You might even ask him if he's be willing to help you with things and pay him! Make him feel like he will be a partner and still be connected to the property. I bet he won't take the money.

See how this approach fits with your valuation of the property and make a determination accodingly.

You can't let your empathy cost you, but you can pay more if the terms are right for a long period of time.

I didn't mean to turn this into a seller financed rant, but it's all applicable to your deal since he's interested.

Best of luck!

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Thanks for the reply Bill! I'm always anxious to pick up info from experienced investors.

At the outset he said he was willing to do a land contract at 20% down at 7% amortized over 20 yrs with a 3 yr balloon. But i wasn't interested in that deal.

Although seller financing sounds good to me as well, I just didn't prefer the terms he gave, I supposed he'd be willing to negotiate but that's something I'd have to find out further.

I think your right to think its not worth even 100k. If he paid 58k and failed to do anything to bring the apts out of the 70's its safe to assume that there is a 3k to 4k per door minimum in upgrades to bring it up to date back into this century. If I have to put 6 units x 3k for a total of 18k into a property in paint and carpet and other cosmetics and then have other repairs too I want that discount off the asking price if its a fair asking price. If its generating 11k net after asking its not even an 8 cap assuming these repairs and ect.
If its worth 105k based on other comps in area then that is a closer true value. How ever that assumes the other comps for 105k also need 18k in cosmetics and also need more repairs on top of that. There is also the work involved bringing that 6 unit up to date doing the rehab to get it into shape so you can rent out units with relative ease and compete in the market place.
It depends on how fast you want your money to move. It also depends on if you plan to carry debt on your property. I like to work for myself and not a banker so I dont carry debt on property I also have high demands for return on my money so I might go after property with a 20+ cap. With returns like that you must find property that needs rehab work.
If your going to get better then a 8 or 10 cap on your money you have to solve problems or do rehab work usually. This property at about 50k to 65k seems more interesting then 140k. At 65k if you have to put 20k into it then you would have 85k into it and you could make that 11k net turn the return into a about a 13% or 13 cap. I think its fair to get low teens if you have to do rehab work.
If this multi unit was in great shape and needed nothing then maybe it could be worth 100k. Since it requires work you must get paid for your time to roll up your sleeves we dont work free in this business.
I am a multi unit guy and I have always been about residual income and thats how I look at most of my deals.
I learned my critieria from an old school guy that had been buying property since the 1930's. He explained to me that fundamentals have been outta wack in this business since the early 90's when easy borrowing and easy money began to get out of hand. He explained to me just because other iodiots line up for financing and easy money doesnt mean we have to put our neck in the noose.
I learned from him that 36 months rent is the price of the property if your buying older multi unit that requires any work at all. So if this property is generating 11k net anual take that number x 3 years and you have a purchase price of 33k. That is probably what I would pay for it using my mentors numbers. That is why I dont buy to many of them anymore. Often times markets can get out of wack and over priced for several decades. Older multi units need a lot of attention too. Thats why I wont over pay. Too many people in this business look up after 20 years and realize they over paid after managing debt for a bank and ikts too late because you wasted precious time that could have been spent on a beach instead.
I bought a duplex for 13k and put 8k into it in heating system and remodel of attic to turn one of the apts to a 2 bedroom apt. The rents around 450 per month per unit for a total of 900. after property taxes In I get 800 a month. 9k a year in rents off a 21k building. thats an example of what reits do they pay 12k to 14k a unit for an income stream of 450 to 650 in rent per month.
I know your market place may seem more expensive dont be afraid to look at other markets if your doesnt add up. Money chases returns and you should be no different then others in your demanding returns on your money. You can offer this guy 60k for this building and probably do ok but my money would be heading for a better deal. When you 1st get into this business and get started its so important not to waste your time managing debt for 30 years that wont return you decent cashflow and returns for teh rest of your life. This post has gotten long but if you want more info on this matter I would be happy to provide it and show you where the deals are so your not stuck feeling left out. Right now the market has never been better for buyers. I just bought a 80k home 2 months ago that needs 11k in rehab for 1200 dollars that can generate 800 a month in rent.
I would like to know what market your in that might change my opinion a little bit but usually I just tell people the money must migrate to where returns are better or you will be sorry in the long run.

Wow, thanks for the reply William. Very interesting post. How I was looking at my deal I figured if I got the property around 105 then put 21 as the down payment I would only have 21k in the property. From there an average rent of 11k or more (which I believe the rent on 2 units could be raised while the other 4 are at market) my return on money invested would be 52% (11/21). That's not including updates of course which I believe would need to come but currently the units are fully rented so the appliances/fixtures are in working order.

Is this not the proper way to look at this type of investment? (and with the 11k net it of course covers all yearly expenses but not big things like updating appliances,etc)

Do you all recommend using an LLC to own properties rather than under your name? If so, how long does it take to setup? I know they are fairly cheap, but curious to the timeframe and if the tax filings were difficult.

Originally posted by Kurt K.:
... currently have an offer in a 6-unit multi-family house. Seller asking $140k with gross profit of $31k and net with $19k(w/o depreciation). Over the last 17 years he has owned the property all years have been profitable with the average being $11k a year in net profit. From investigating on my own the seller bought the place for $58k. It has a roof that is 6 years old and a new boiler. ...

OK, 6 units, and one boiler = landlord pays utilities at least for heat

I doubt there is a net of $19K based on gross of $31K with landlord paid heat.

So right there, you should be clued in to be suspicious of any seller supplied data - it tends to overstate things in favor of the seller, much to the detriment of any would-be buyer.

And the fact that the seller bought it for so little will partially explain the lower out-of-pocket for the seller; a buyer paying more will have bigger costs to deal with (in terms of debt service at least).

he paid 4980 in utilities last year. Also I believe it is split and some units are on forced air some on boiler. Tenants pay electric. Also current seller owns it free and clear. Note average income over the years is 11k. 19 was its most profitable year

Update*

Seller has stated he is only willing to come to 125k and says that he'd rather just keep it than go lower. He is also not willing to negotiate seller financing terms, so it seems this deal may not work out.

I still would like to see what a traditional lender has to offer in terms of interest rate and down payment required as this would be a commercial loan with it being 6-units. Does anyone know roughly what these numbers would be? required % down and rough guess at interest rate? I have no experience on the commercial loan side.

Update!!

Seller accepted my offer of 20 down 105 seller financed balloon in 10 years. Very surprised he accepted. He is willing to do a mentorship of sorts as this was his final house to sell in his portfolio and my first. Very excited about the transaction. Now have to buckle down to get ready for ownership and my business to finally start!

@Kurt K. - you did not mention the interest rate, but did you run an amortization table to see how big your monthly payment will be under the agreed to terms?

Thanks for this update, I was reading over the post and wondered what the outcome was. Sounds great that he's willing to help out and with seller finance, this free's up a lot for your future lending needs. Hopefully you'll keep up on updates with things you've learned along this process.

Oh sorry Steve it is 6% amortized over 20yrs equaling payments of 752.25 a month.

Gross rents are currently 2,575 a month and can be raised to 2,795 a month if all units at market prices.

In which case given current rent (which one unit possibly 2 will be raised, one substantially for sure) and current expenses can easily cover payments/expenses and be able to save for the balloon as I'm leaning on likely just paying it off rather than going for a refinance, we'll see what rates are in 10 years.

Hi guys, things are still moving along on the property. Inspections going on tomorrow and I'm working on getting the insurance lined up.

I was just thinking more about the utility situation where the seller is paying about $5,000 in utilities. Would it be wise (in the future when the cash is available) to look into getting the units on separate meters? If it could save, say, $3,000/yr in expense at 10-cap it would add $30,000 in equity to the property. I have no idea the cost/difficulty of getting such a transition done, but at first glance it seems appealing. Just a thought.

Yes i agree with separation of electric utilities, but when I buy multi units without separated utilities i subtract the cost of separation off the price. When i bought a 4 unit months back I also bought in an area where homes sell between 60 and 80k and I paid 32k for this 4 unit.
My 4 rents are 1700 per mo and I pay 450 in utilities on average per mo.
I negotiated a 10 year contract with sellers with 3k down. They also own free and clear and I see ab out a 2k per door in upgrades over time to bring out of the 1980's. My building sits on a double lot so plenty of space for parking and a yard as well as a 2 car garage for free storage for me. The building has a arv of about 60k and is taxes at 65k.
I use this example to show you what I mean in regards to numbers.
The neighborhood is stabilized and there has not been a murder within a mile of the property in many years. This property may not be something i would buy for appreciation but I never buy for that. I buy for 2 reasons cash flow and an instant spread I can sell and make money on if i decided to.
Its hard to make lots of offers and go away empty handed so here is an idea rather then quit in your negotiations I have a tendency to make my low offer and just tell them please hold my phone number and call me back if you cannot sell it in a reasonable time frame. If you walk away and your friendly when u part ways, you have a good chance over time of a some of your deals coming full circle back into your arms again later.
The 4 unit I talked about above was a deal that toke 9 months to buy. The owners left town and finally they called the broker and said go ahead and take his offer of 32k. We were almost 10k apart when they left town. 4 months of managing out of town made owners decide to come back to negotiation table and finally settle on my price of 32k.
This is your business dont accept other peoples numbers for what cash flows in your business.

Thanks for the reply @William Bannister . That is a great example of getting a property at a discount for sure! Hopefully I will pull off a few of those in my career :)

This 6-plex has very good "eye appeal" for the area and is 1 block from the college in town so it has a very good location. Also, once rents are raised closer to market levels on 2 of the units it should be bringing in approximately $34,260 gross. After expenses based upon his prior tax returns and the inclusion of debt service the number is closer to $12,800 net (my down payment is $20,000). Where on a 10-cap basis values the property at $128,000 and/or $12,800/$20,000 is a 64% return on cash invested or about 1.5 years till it returns all cash invested and playing with the "house's money".

My goal is to buy and "never" sell so I am okay with buying at market value on this property given it's cashflow, although it certainly won't be a home-run by appreciation standards, by the time I'd sell (ideally) a modest 2-3% over 30+ years it should hold it's value ;). My goal is to accumulate enough rental income to live off of. and once the house is "free and clear" in 10 years, the net should be closer to $21,800 a year. At that rate I'd only need to find a few more of these properties to reach my goal and I'd be on my way to setting a larger goal!

**Update**

Had the inspection done today. The seller walked us through and opened the doors to the units for the inspector and myself. There were a couple of units that I did not see on the first pass that we went into.

1 unit is absolutely filthy (pizza boxes, clothes, trash, etc everywhere throughout apartment) and the other unit is a lady's that has been renting for about 35 years he said (she is around 80) and she has wallpapered everything, even wallpapered the ceilings with some sort of white paper! Those 2-units were disasters. The other 4 seemed to be in reasonable condition.

There were multiple GFCI outlets that didn't work. The basement was also quite intimidating with wiring all over the place from different work done through the years, even before the current owner. One renter (from the filthy unit) said that their light didn't work and something "went-out" in the unit next to him too. So I don't know if that is further trouble waiting to happen as well. The house was built around 1890 or so with add-on jobs in the basement it looked sketchy.

The inspector and seller knew each other and are friends... but at the end when the seller left the inspector told me he wanted to go over some of his concerns with me on Saturday to discuss potential expenses/work that needs to be done in the home. He didn't hint too much on what concerned him today, but he did mention that he wouldn't buy a multi-unit house where all of the utilities aren't separated (he has done some rentals of his own as well). In this building 2 of the 6 are on their own and the other 4 share. He came across as this being my first one, he doesn't want me to bite off more than I can chew!

More details to come after our meeting Saturday morning, however seeing the basement and the 1 unit made me a little uneasy as there seems to be a lot of work to be done to get things "right".

**Update**

Was concerned about electrical issues after the initial inspection so had a family friend, also one of the best electricians in the area, check out the house. He said he thinks that everything is fine it was just done in a sloppy manner.

We are scheduled to close on 2/7/13!

I am also scheduled to sit down with the seller for a bit of a "boot camp" about how he ran the property over the last 25+ years.

**Update**

Just got back from closing on my 6-unit house! I'm an official investor having completed my first deal! Thanks for everyone on this thread as well as the BP community in general. It was great coming from closing with Prorated rent in hand. I know there will be bumps along the way, but I'm excited to start out on this journey! Thanks again everyone!

Sat with the seller for 2 hours discussing the business and the property after close. Meeting him again Saturday for further discussion. He has many great stories and insights. I feel fortunate to have his input with this being my first deal.