My first 9 Unit: is it a GO or NO GO

Multi-Family and Apartment Investing
5yFollow

My first 9 Unit: is it a GO or NO GO

William Moya
Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes

Any feedback would be awesome, what am I overlooking? Good or Bad. Thanks in advance!

I have this property under contract and my inspection period ends today.

Purchase price at $525,000, 

Rehab Estimate $200,000 to $250,000

I have a cash partner & I will do all the work (Manage the Rehab, Property Management and Market to resell when complete.

Please see image below of numbers breakdown. 

Any feedback will be greatly appreciated. and if in the future you would be interested in partnering in a deal similar to this please let me know. 

Happy Investing!

13Reply
62 views

Most Popular Reply

Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
5y

@William Moya.  I am assuming you are talking all cash purchase and rehab, since there is no line item for debt service.

I do not know FL, but 5% operating expenses seems excessively low, especially when you have no line item to real estate tax at $525k or insurance.  

From there, you will have turn costs, likely in the $250/door/year range, but could be higher or lower.  You have no line for leasing commissions, typically 1 month rent when you outsource.  Landscaping, house meters, etc.

I would just really dive into your expense budget.

6Reply
See this reply in the discussion

27 Replies

Jump to latestLatest
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    5y

    This multi-family real estate stuff gets me happy on a Friday morning. Coffee in hand. Where is the $126,414 coming from? Is that your partners portion of the down payment? 

    3Reply
  • David Avery
    Flipper/Rehabber · Phoenix Arizona · Member since 2020 · 1k+ posts · 686 votes
    5y

    From a contractors point of view .

    Are you re wiring, new plumbing, new roofs?

    New paint, new kitchen, bathroom, and floor coverings?

    New windows, sheetrock, trim and doors.

    New appliances?

    Will it double your rent?

    Are you keeping this long term?  ( biggest question).

    I understand you want the numbers looked at, but the re hab is either

    going to make you or break you.

    If I were younger and single I would have you fly me in and I would knock it out and

    save you a lot of  headaches!

    4Reply
  • David Avery
    Flipper/Rehabber · Phoenix Arizona · Member since 2020 · 1k+ posts · 686 votes
    5y

    I would also do the work for  2  of the units.

    Now we have something to think about. 

    Trade labor for 2 apartments.  I get the rent and equity share of same!

    Just a thought!

    my coffee just kicked in!

    0Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    Hi @jasonwalling this number is the estimated the number my partner and I will profit. He will be putting in the purchase price $525,000 plus the rehab $200,000 and $250,000. Once we bring the rent to market rents and its fully rehabbed we will sell or I will Refinance and pay him his profit and principle. Estimated time frame is 12 months for this project.

    2Reply
  • Stephen Brown
    Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes
    5y

    For your expenses, are you just assuming 15% or did you actually break it down? You need to know the expenses exactly from the seller.

    2Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    Hi @davidavery thanks for reaching out. in response to your questions:

    Are you re wiring, new plumbing, new roofs? New roof, electrical looks good, we might need to do some plumbing.

    New paint, new kitchen, bathroom, and floor coverings? Yes to all of these.

    New windows, sheetrock, trim and doors.

    New appliances?  Yes

    Will it double your rent?

    Are you keeping this long term? ( biggest question). My partner wants to get his principle out, so , I will either sale or feri to get his principle and profit and I will hold long term.

    Unfortunately, the property cannot be separated as they are all on one parcel and my partner wants to be one only one on the deal. But I like your thought process.

    Thanks!

    0Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    5y

    @William Moya.  I am assuming you are talking all cash purchase and rehab, since there is no line item for debt service.

    I do not know FL, but 5% operating expenses seems excessively low, especially when you have no line item to real estate tax at $525k or insurance.  

    From there, you will have turn costs, likely in the $250/door/year range, but could be higher or lower.  You have no line for leasing commissions, typically 1 month rent when you outsource.  Landscaping, house meters, etc.

    I would just really dive into your expense budget.

    6Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    Hi @stevenbrown I am estimating as they did not provide the expenses with the exception of a utility bill, I can see the taxes and i got an estimate of the insurance, they are not being forthcoming on the bills as the property is really run down. The current rents are in the range of $595 to $650 and the market rents are in the range of $825 to $850 each.

    0Reply
  • Erik W.
    Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
    5y

    15% Operating Expenses is low, even for a freshly redone property.  Taxes and Insurance alone will likely run around 10%.  Add in property management 10% and lawn care + trash service + free WiFi that everyone expects and my guess is your total Operating Expense will be closer to 30%.  Plus, I see no set-asides for Capital Expenses like HVAC systems, water heaters, roofs, and other "big ticket" items that are wearing out yearly but only get replaced once every 7-15 years.  That will lead to deferred maintenance.

    Re-evaluate given these considerations and see where you are.  My guess is cash flow will be significantly less and could even run negative.

    5Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    Hi @evanpolaski, Thanks for bringing that up yes the taxes are about $5600 per vear and the insurance about $3500 per year and I did overlook the commissions on the lease up, thanks! 

    2Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    5y

    @William Moya, 5600 + 3500 = 9100, or about 11% of your gross income already.  SO without any repairs or other bills, you are already at 21% for just Insurance + Taxes + Management.  

    As Erik mentioned, extremely efficiently run properties might push into 30% expense ratio, but I would budget closer to 40%, or roughly $36,000/yr in operating expenses before any debt service.

    2Reply
  • Neil Schoepp
    Real Estate Investor · Milford, PA · Member since 2014 · 395 posts · 299 votes
    5y

    Your Expenses are WAY TO LOW.

    As a general rule expenses are 50% of GPI. 

    I would expect a well ran stabilized property to land between 40-45%  You are at 20%.....5% vacancy+5%opex+10%PM

    Each market and class of property will have a per unit cost for expenses My market is 3900 - 4200 this includes everything but CapEx and Debt Payment.

    Is this an all cash deal? If not then You need to show debt servicing in your numbers. 

    Using your GPI and a 6 cap with 45% expenses I value this property at 816K at stabilization.

    Op cost included: Taxes, ins, utilities, marketing, professional fees, contract services (lawn care, trash, pest control) Unit turns, repairs and maintenance, property management. All of these numbers are market specific but in my market just the taxes on a property this size would be 5-7% of GPI

    3Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    @erikw Thanks for the info,  So, on average should I estimate about 30% on average for all expenses? if there is not debt on the property as a rule of thumb? 

    I greatly appreciate it your input.

    0Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    @Neil Schoepp Hi and thanks for the info. I will pass on this deal and look for another one that makes more financial sense especially since my investor is a good friend of mine and I definitely do not want to lose his money.  On to the next one. I greatly appreciate your help!

    3Reply
  • Justin Hoggatt
    Investor · Morrison, CO · Member since 2015 · 221 posts · 177 votes
    5y

    This deal particularly struck my attention because it is so eerily close to my first apartment deal.  My first thought is how are the rehab costs so high?  You must be putting some major renovations into it.  Perhaps this is an over budget look?  I think you could maybe run it a little leaner than 45% operating as some have mentioned after a full rehab and perhaps you could even get high rents than you anticipated in a year and it'll be worth more.  When I did my 9 unit I started from the top down as it was essentially three stories with 3 units on each level.  I got the top 3 done, rented and cash flowing, and then moved down.  I am not sure how quick you'll be able to get the $250k in renovations completed, but I think you try to stick to the outside work later and get the work done on the inside so that you could get that rented.  Consider doing 6 month leases or shorter than a year lease so that after you're done, you can increase rents further and not get stuck with year long leases when you're trying to sell/refi after a year.  Do you know what your current cap rates are in the area?  It seems like you're looking at a 6, and you'll obviously notice that going up or down 1% makes a huge deal there.

    I would think that based on a quick look at this, the property may be worth more along the lines of $950k.  That will obviously greatly depend on your rents and expenses.  If you have the opportunity to make a 2/1, do it!  Also, make sure that you do a RUBS or whatever works to make the tenants pay the utilities expenses - that's a big deal in the end.  If you can keep your budget down on the remodel, you're returns will be higher in the end, so really ask yourself, is it necessary?  Do you need to spend $250k to get 9 people in there at $825+ rent?  Maybe that answer is yes, and then if you could each make $100,000 in a year on this project, is it worth it to you?  

    0Reply
  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    how did you come up with that rehab budget? did you actually get some line-by-line quotes from an experienced contractor? do you have any prior rehab/construction experience? that's a huge undertaking (not saying impossible) for your first deal. most people end up being on the low side of things. 

    like everyone else had said, your operating expenses are really low as well. 

    1Reply
  • Francis Louis Vogel Jr
    Banker · Saint Clair Shores, MI · Member since 2011 · 131 posts · 53 votes
    5y
    All great comments. Sounds like a winner!
    1Reply
  • Peter Nikic
    Investor · New York & TN · Member since 2019 · 325 posts · 219 votes
    5y

    On the surface, not worth it. all this cash to get 9 rents @ $825 ea doesn't seem like a great return. Too many uncertainties and unknowns could make this very uncomfortable and risky for your partner. Since you have no $$ in the game, you could always walk away, but he can't. 

    2Reply
  • Jonathan StonePro Member
    Rental Property Investor · Camas, WA · Member since 2020 · 284 posts · 202 votes
    5y

    @William Moya

    This post has generated so much great feedback already. My only advice is to take that in. Recapture all of the numbers after assessing them, speak to at least two experienced professionals in your market and verify your numbers in your market.

    In addition don’t forget how difficult it can be to get both materials and labor in the current market. I have seen materials jump 20-30% in the last 18 months. I’ve also had contractors tell me they are 6-8 months out from taking on a project. Make sure you have contractors lined up as the holding cost could burn your partner in that situation.

    3Reply
  • Daniel SmythPro Member
    Rental Property Investor · Rockford, IL · Member since 2019 · 471 posts · 342 votes
    5y

    @William Moya

    Your inspection ends today?

    Your move.

    I have ideas, but it's Your move.

    [email protected]
    1Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    @Justin Hoggatt thanks for you feedback. The rehab is pretty extensive. Needs a new roof the AC units may have to be replaced, the building is infested with mice and rats so we might have to fix the air ducts the repairs that were done have to be redone. Some of the bathrooms are okay but the kitchens have to be redone, some of the windows are broken. Etc. I believe I might be able to get it done for $200k, but I an afraid I may run into surprises as its always the case. Lol.

    Since many of the posts mentioned I was too low on my numbers I decided to pass on it and look for a better deal.

    This has been a great mini seminar with ton of nuggets.

    Thanks to everyone.

    1Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    @Victor S. Hi, yes I had 4 estimate from contractors ,roofers painters, etc. And yes I have done about 50 rehabs some quite extensive buy only on SFR.

    The estimates ranged from $200k to $300k but in order to get the property to current market rents we would have to put in quite a bit of money.

    0Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    @Peter Nikic I agree I actually passed on it, my partner seemed like he wanted to proceed but I advised him not to and that I would rather look for a better deal. Specially since he is a good friend and I've know him for a long time.He was appreciative at the end of the day.

    I advised him that for that amount money we can spread the risk on multiple deals.

    Thanks for your help, I really appreciate it.

    2Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    @Jonathan Stone thanks so much for your advice, I agree 100%. And will take your advice to heart.

    On to the next deal, I appreciate you.

    1Reply
  • William Moya
    OP
    Property Manager · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes
    5y

    @Daniel Smyth

    I got cold feet and backed out. Buy I know I can get him back on the hook if I can come up with another angle. He actually came down to $500k late in the day. Any suggestions?

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free