Analyzing a 5 Unit Rental

19 Replies

Good Afternoon!

I've been looking at a bunch properties and i think i've finally found one that would be a good first investment and i was wondering if the community at BP could help me out at all?

It's a 3 story, 5 unit apartment building. It's in the center of a small town that's growing.

The taxes seem really high, but it still seems to cash flow when i run my numbers. 

Question: How would I or could I appeal the taxes and get them lower?

I'm not sure if i'm missing anything else, so any advice would be great before I jump in...

Here are my figures (calculated monthly)


Purchase Price: $93,000.00

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Total Rent: $2,730.00

Insurance: $52.00

Property Management: $163.80

Capital Expenses: $273.00 (i just used a 10% estimate)

Maintenance: $136.50 (5% of Total Rent)

Vacancy: $163.80 (avg vacancy for the area is 6%)

Utilities: $448.25 (this number seems high, but i flesh out below where it's coming from)

Taxes: $593.95 (this seems really high and i'm wondering if there's a way to get it down.

Mortgage: $499.00 (93k @ 5% interest rate over 30 years)

Cash Flow: $399.70

Net Income - Mortgage: $898.70

Cap Rate: 12%

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It needs 1 new hot water heater, but he'll have that replaced before purchase.

1 unit is vacant, but again, it'll probably be filled before i purchase it.

There could definitely be some other repairs, but nothing major and just maintenance things that aren't urgent.

Utility Explanations

Monthly Utility Averages for 2017 YTD:

  • Gas: $72.43 (for hot water only, no heating bills are paid)
  • Electric: $39.31 (For common area lighting and circulating pumps on boilers)
  • Water: $72.95
  • Sewer/Refuse: $263.56 (Charged by the unit for refuse + usage for sewer portion)
  • Total Monthly Utilities: $448.25

This seller also has other properties for sale that if this one works out, it might be a good way to grow my portfolio.

Some Property Pictures

Apartment 5 (only one I have pictures of right now but most are laid out the same)

Maintenance and insurance estimates look low.
Did a management company quote you a rate or is that an estimate?
Management varies a bit and you can run into crazy things like a company that charges to rent their 'for lease' sign.

Did you get a quote on the insurance and does it include 'landlord insurance' - basically a general liability policy and lost rents?

What have the annual expenses for maintenance been for the past 2 years?

Are you sure you can get a 30 year fixed on a commercial (5 unit) property?

Call the tax adjuster and ask what taxes would be if you bought a building for x amount.  

I Feel you are over estimating your return. I think it will end up being closer to 8% by the end of your first 12 months. But this seems like a good deal; good price per door and good gross rent multiple.

I'll call those places and check for sure!

Thank you so much!

The management price was a quoted price from a company in my area. They charge 6% and then 1/2 a months rent to place a tenant.

I'm going to the bank tomorrow to talk about financing options. Any other suggestions on financing 93k?

Thank you,
Jason

The rent on 1 of the units should definitely be increased as well and the average tenant is paying $525 and rentometer says for that area the rent should actually be $631.

So even if I raised all the rents just $600 and got the larger unit up to what it should be, then my rental income would be: $3,100

@Jason Henry-Ruhl

Did you get a quote from an insurance company or it's estimated?  I pay way more for multifamily properties in Philadelphia.

I'd recommend to get actual (not projected) numbers from the seller for vacancy and maintenance. 

How about snow removal and loan maintenance? 

Good advice! A lot of places I've been reading have said use percentages which never made sense to me anyway.

The property management company I would go with would do the snow removal as well.

Thank you all for the help so far! Hopefully I'll have updated numbers soon to post!

Any suggestions on creative ways to finance it? I was thinking about just trying to get a commercial loan. Any way to get a potential quote without hitting your credit score?

Thanks,
Jason

That looks like a solid deal...I'd suggest taking it up to 10% vacancy to be more conservative.  It'll depend on how aggressive that manager is on renting out vacancies.  Is that a flat roof?  I'm not sure how much that would increase the capex over time.  

For loans, I'd suggest calling around to a bunch of the local community and regional banks, asking to speak to their commercial loan officer, and writing down each of their options. They'll give you a ballpark figure if you describe your deal and tell them your credit score is high 700's or above...below that it can affect things a little. Generally a lot of places will give you a 5yr term, 20yr amortization, with a rate around 5%, and origination fees of about 1%. You're looking for the banks that will give you 80% LTV instead of 75%, and also looking for the very rare bank that might offer 25yr amortization instead of 15 or 20yrs. I called 30+ banks before getting commercial loans in the past 6 months. Probably 10-15 offered 80% LTV, while only 2 offered a 25yr amortization.

Jordan, thank you so much for that suggestion! I'll start calling banks today.

My credit score is above 700 so that should help!

The roof is flat and it's a rubber roof but it was also just recently replaced.

Thank you guys! Getting quotes takes longer than finding properties. Lol

@Jason Henry-Ruhl , it certainly passes all my napkin calculations. I've heard of the 1% rule, and the 2% Rule, but this one would nearly pass a 3% Rule! I'm curious though: Who would be lending you 100% financing?

For deals like this, Lenders will normally expect YOU to have 20-25%, and only lend you the rest.

One thing that stuck out to me was vacancy rate. What if it proves to be much higher than 6%?

Also, Property Management. 10%/m ($273) is considered normal by many Property Managers.

My other concern is: how many deferred big-ticket (or smaller) cap ex items are lurking around the corner?

As and when you can afford it, how about looking to separate the utility bills, for Tenant responsibility?

You need to be gathering a Contractor and Property Manager team around you, NOW. All the best...

@Jason Henry-Ruhl

A couple things popped out at me. I'd request a quote from your insurance company, because $624 sounds really low. Also, consider turnover in your property management number. If this is a transient tenant base, and 3 of your units need rented on a yearly basis, the total of the 1.5 months rent tenant placement fee will add up. Additionally, I would kick your maintenance estimate up as well, because $136 probably won't even pay for a single service call each month.

If you can't get a loan because of something the bank doesn't like about your profile and not because of something the bank thinks is wrong with the numbers/property, try to do a seller finance deal.

@Brent Coombs , so what i've been finding is that a lot of banks will lend 70-80% LTV. The assessed value of the property is $130k. so 70% of that would be 91k. So from my understanding, i should be able to get a loan for pretty close to the asking amount right?

@Matthew Olszak, I'll definitely bump up the maintenance. I'm getting a history on the complex over the last 2 years. so once the seller gets me that, i should have a better number.

The property management company around here charges 6% and then 1/2 months rent to put a new tenant in. But i didn't think about turn over rates for that specific location. I did look up that in that area, the vacancy rate is 6% as well, but it'd be better to make that larger either way, and i need to check if they charge 1/2 months rent per vacant month, or just in general.

I talked to the seller about financing options as well. He said he wouldn't do full seller financing, but he might be willing to do a secondary loan. So for example in Brent's question, if the bank won't loan 100% i could probably have the seller loan me the 20% down that i need to get the loan from the bank. 

Calling banks and insurance companies over my lunch break to try and get better numbers down as well. does anyone have any insurance companies that will quote them on a commercial property over the phone? Nationwide will only do in person.

Originally posted by @Jason Henry-Ruhl :

@Brent Coombs , so what i've been finding is that a lot of banks will lend 70-80% LTV. The assessed value of the property is $130k. so 70% of that would be 91k. So from my understanding, i should be able to get a loan for pretty close to the asking amount right?

@Matthew Olszak, I'll definitely bump up the maintenance. I'm getting a history on the complex over the last 2 years. so once the seller gets me that, i should have a better number.

The property management company around here charges 6% and then 1/2 months rent to put a new tenant in. But i didn't think about turn over rates for that specific location. I did look up that in that area, the vacancy rate is 6% as well, but it'd be better to make that larger either way, and i need to check if they charge 1/2 months rent per vacant month, or just in general.

I talked to the seller about financing options as well. He said he wouldn't do full seller financing, but he might be willing to do a secondary loan. So for example in Brent's question, if the bank won't loan 100% i could probably have the seller loan me the 20% down that i need to get the loan from the bank. 

Calling banks and insurance companies over my lunch break to try and get better numbers down as well. does anyone have any insurance companies that will quote them on a commercial property over the phone? Nationwide will only do in person.

The 1/2 month rent fee is, I assume, just their fee to place a new tenant and not a monthly thing. So if a unit is vacant a year or a day, it won't matter, you'll just owe them 1/2 of 1 month's rent for their work to put a tenant in the unit.

For the vacancy, you've got 5 units x 12 months/yr x 6% vacancy, which is 3.6 months. Looking at the turnover will tell you if you can expect every unit to need a new tenant and be out of service for 0.75 months each (3.6mo/5units) or if it just takes a long time to rent a vacant unit and those 3.6 months are maybe split between just 2 units because most tenants stay put long term. If you have to re-rent all 5 units every year, you not only lose 3.6 months of rent due to the units being vacant for 0.75 months each, but also lose 0.5 months rent x 5 units for the tenant placement fee ($1500 total assuming $600/mo rents), which is much different than losing 1.8 months on 2 units each (still 3.6 total) due to vacancy but only losing 0.5 months rent x 2 units for tenant placement ($600 total).

If I'm thinking of this the wrong way someone please correct me.

Originally posted by @Jason Henry-Ruhl :

@Brent Coombs, so what i've been finding is that a lot of banks will lend 70-80% LTV. The assessed value of the property is $130k. so 70% of that would be 91k. So from my understanding, i should be able to get a loan for pretty close to the asking amount right?

@Matthew Olszak, I'll definitely bump up the maintenance. I'm getting a history on the complex over the last 2 years. so once the seller gets me that, i should have a better number.

The property management company around here charges 6% and then 1/2 months rent to put a new tenant in. But i didn't think about turn over rates for that specific location. I did look up that in that area, the vacancy rate is 6% as well, but it'd be better to make that larger either way, and i need to check if they charge 1/2 months rent per vacant month, or just in general.

I talked to the seller about financing options as well. He said he wouldn't do full seller financing, but he might be willing to do a secondary loan. So for example in Brent's question, if the bank won't loan 100% i could probably have the seller loan me the 20% down that i need to get the loan from the bank. 

Calling banks and insurance companies over my lunch break to try and get better numbers down as well. does anyone have any insurance companies that will quote them on a commercial property over the phone? Nationwide will only do in person.

No, it's not correct that you "should be able to get a loan for pretty close to the asking amount". That would only apply if you ALREADY owned it (with no mortgage against it) and were searching for a "Delayed Financing Exception" loan, or, had already owned it for at least 6 months and were seeking a RE-finance. See the difference?

Back to the drawing board (and, hitting the savings account)? Good luck....

Originally posted by @Brent Coombs :
Originally posted by @Jason Henry-Ruhl:

@Brent Coombs, so what i've been finding is that a lot of banks will lend 70-80% LTV. The assessed value of the property is $130k. so 70% of that would be 91k. So from my understanding, i should be able to get a loan for pretty close to the asking amount right?

@Matthew Olszak, I'll definitely bump up the maintenance. I'm getting a history on the complex over the last 2 years. so once the seller gets me that, i should have a better number.

The property management company around here charges 6% and then 1/2 months rent to put a new tenant in. But i didn't think about turn over rates for that specific location. I did look up that in that area, the vacancy rate is 6% as well, but it'd be better to make that larger either way, and i need to check if they charge 1/2 months rent per vacant month, or just in general.

I talked to the seller about financing options as well. He said he wouldn't do full seller financing, but he might be willing to do a secondary loan. So for example in Brent's question, if the bank won't loan 100% i could probably have the seller loan me the 20% down that i need to get the loan from the bank. 

Calling banks and insurance companies over my lunch break to try and get better numbers down as well. does anyone have any insurance companies that will quote them on a commercial property over the phone? Nationwide will only do in person.

No, it's not correct that you "should be able to get a loan for pretty close to the asking amount". That would only apply if you ALREADY owned it (with no mortgage against it) and were searching for a "Delayed Financing Exception" loan, or, had already owned it for at least 6 months and were seeking a RE-finance. See the difference?

Back to the drawing board (and, hitting the savings account)? Good luck....

I think there are other options, like even getting 70% LTV of the 93k, i can do seller financing then for the other 30% with the owner, and then at 6 months refi.

Where there's a will, there's a way!

You may also have difficulty getting a bank to finance anything if there is even a hint of a second. Stated differently, some banks will kill the deal if there is seller financing - even if it is well documented that the seller will be junior to bank.     

@Jason Henry-Ruhl , as Ken surmised: Your Lender may DISALLOW your "deposit" to also be borrowed!

(However, if your "deposit" is secured against a DIFFERENT asset eg. a HELOC, then you might not have that problem).

I guess they want to know what the deposit is secured against? I was figuring I'd the seller just lent me the money, then the bank would just get a check for the down payment right?

Originally posted by @Jason Henry-Ruhl :

I guess they want to know what the deposit is secured against? I was figuring I'd the seller just lent me the money, then the bank would just get a check for the down payment right?

Yep. Banks WILL want to know whether your deposit is also borrowed, and what it's secured against. In the case of Seller Financing, the Seller is NOT providing you with any money. All they're doing is lowering the mortgage balance that you have to pay THEM monthly by the amount that you give THEM as a non-refundable deposit - until their "balloon" time's up to pay them out - or they then foreclose on you!

Or, good luck finding a Seller who'll give you similar terms to an Investment Lender, but agree to 100% "funding"!

Or, maybe a Seller might not care that the (large?) deposit they ask from you is borrowed, and they may still agree to "fund" the balance themselves. It's a particular type of Seller that might agree to monthly payments rather than total payout at closing. [They can then hope that you DO default, so they get to own their property again, and keep all the payments you've already given them]. Cheers...

@Jason Henry-Ruhl you might want to look into what you get from the PM company for the 6% they are charging. From the many conversations I've had most guys don't mind paying 8-10% because their PM's are doing a great job. Perhaps drive by some of the properties they manage. Just a thought.

All the best to you...

Jorge

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