Fixer upper in beat up neighborhood. NOI 50k

Member since 2016 · 13k+ posts · 12k+ votes

9y

As a first time investor you are probably way, way over your head on this deal.

First if you intend to improve the properties you will most likely need to get rid of all existing tenants, probably a must to rehab anyway. Second if you are not experienced with C-D class properties you must have a highly qualified PM to manage the property or upgrading will be a waste of your time.

Do not expect to flip and make a profit, no experienced investor will buy into a unproven appreciation of 300K.

Your ARV will be driven by the value of the neighbourhood not your improvements. You may not achieve any ARV improvement unless the entire neighbourhood turns around. Being the first to go is very high risk.

Bottom line is it is a far better investment to buy and leave it exactly as it is with the present rent to value then to spend a dime to improve it. It already makes a good return, put on a Band-Aid and reap the rewards.

1 Reply

Chinmay J.

Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes

9y

Originally posted by @Milind Shastri:

Hello everyone!

I'm looking at a 10 unit row of apartments in Baytown, TX which I drove through. I am currently building my mental model of understanding the investment property well so that I can close the deal if it does seem like an opportunity. Here are my observations based on the listing and drive-through:

Selling price is 300k+ and estimated ARV is 600k+ as per seller (rapid equity building opportunity)
current NOI is ~40k. After repair NOI ~60k. (great cash flow!)
rehab costs are not known (but perhaps much 100-150k; I have not invested or fixed yet so this is a total guesstimate)
The neighborhood looked quite beat-up and about 10% houses in a quarter mile radius have broken walls, plywood patched windows, and/or rusted cars parked. Again 10-20% are well kept (the kind that has well-kept gardens and potted plants outside).
It's the corner row of houses next to a railroad (fixing the properties will make the road much more livable and appear safer)
trees/bushes/grass is overgrown; seems like a cheap fix
current tenants have kept the property quite bad: trash outside, broken windows and from the looks of it, perhaps, trashed the place inside too. Looks like a drug friendly block.
it looked like a 4plex+3plex+3plex
I live 5 hours away from the property

I am going to find a hard money lender to purchase and rehab; the seller is also providing hard money financing for the purchase and rehab.

I am looking for advice on how I can successfully proceed in this investment journey and things l will need to look out for as a first-time investor. I am sure I have missed out information here and will be more than happy to provide it!

Cheers and thanks!

Milind

Hate to sound like a negative Nancy, but if you are a first time investor, its a very big project for you to take on. Who is going to manage these properties. You will have to find a really good PM and then able to manage the PM.

If you want to get involved in this, I would suggest a JV of some kind with a seasoned investor. Also, need to ask if these are Section 8 or just regular tenants?

1 Reply

Chris Martin

Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes

9y

Uh. How did you arrive at your numbers? "current NOI is ~40k. After repair NOI ~60k. (great cash flow!)" Based on.... your expert analysis? The owner's tax returns? What?

Just curious if you reviewed the leases and determined what your default rates are. And the property is managed by... a licensed broker? The owner?

Way, way too many red flags on this, IMO. 5 hours away... Holy cow, man.

0 Reply

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

9y

Milind Shastri I don't know Baytown at all, never been there, but based on what you're saying it sounds like a "D" neighborhood. I'm guessing that after putting $100K into it (the lower side of your estimate) you'd still get the same rents. Why? Who would want to pay more to live in that neighborhood? They'd just pay the same raised-rent to live 1/2 mile away in a better area. Not to mention that when the seller says anything about an ARV value, take it for the grain or salt that it is. If the owner thought that putting $100K into rehab he could get $300K more on the sale price (netting $200K) he would do it. The scary part is that I could be right...or wrong. You could be right...or wrong. Other people chiming in could be right...or wrong. Here's the salient point: it's your first time so if you can get approved you'd better believe it will be a full-recourse loan. Which means, if you're wrong you don't just lose your original investment, you're on the hook for entirety of the loan. Anyway, not advocating a "yes" or "no" just tossing out some perspective.

1 Reply

Milind Shastri

OP

Investor · Allen, TX · Member since 2016 · 104 posts · 37 votes

9y

Originally posted by @Thomas S.:

As a first time investor you are probably way, way over your head on this deal.

First if you intend to improve the properties you will most likely need to get rid of all existing tenants, probably a must to rehab anyway. Second if you are not experienced with C-D class properties you must have a highly qualified PM to manage the property or upgrading will be a waste of your time.

Do not expect to flip and make a profit, no experienced investor will buy into a unproven appreciation of 300K.

Your ARV will be driven by the value of the neighbourhood not your improvements. You may not achieve any ARV improvement unless the entire neighbourhood turns around. Being the first to go is very high risk.

Bottom line is it is a far better investment to buy and leave it exactly as it is with the present rent to value then to spend a dime to improve it. It already makes a good return, put on a Band-Aid and reap the rewards.

Thanks Thomas. I am considering your band aid suggestion.

(Also I reviewed the listing further and the seller calculated the ARV based on a 9% cap rate in the area w a ~$60k NOI which leads to $540k valuation. Something is off here but I'll let it go for the moment. With current NOI of $40k & 9% cap the property still evaluates to $360k. Looking good but I need to verify all of this.)

0 Reply

Milind Shastri

OP

Investor · Allen, TX · Member since 2016 · 104 posts · 37 votes

9y

Originally posted by @Chris Martin:

Uh. How did you arrive at your numbers? "current NOI is ~40k. After repair NOI ~60k. (great cash flow!)" Based on.... your expert analysis? The owner's tax returns? What?

Just curious if you reviewed the leases and determined what your default rates are. And the property is managed by... a licensed broker? The owner?

Way, way too many red flags on this, IMO. 5 hours away... Holy cow, man.

The current and after repair NOIs were provided in the listing which includes rent(59k), vacancy(3k), maintenance (3k), insurance(3k), taxes(5.6k) & 7% management(4.1k).

I haven't reviewed the lease or gotten details on the property management yet.

0 Reply

Milind Shastri

OP

Investor · Allen, TX · Member since 2016 · 104 posts · 37 votes

9y

Originally posted by @Chinmay J.:

Originally posted by @Milind Shastri:

Hello everyone!

I'm looking at a 10 unit row of apartments in Baytown, TX which I drove through. I am currently building my mental model of understanding the investment property well so that I can close the deal if it does seem like an opportunity. Here are my observations based on the listing and drive-through:

Selling price is 300k+ and estimated ARV is 600k+ as per seller (rapid equity building opportunity)
current NOI is ~40k. After repair NOI ~60k. (great cash flow!)
rehab costs are not known (but perhaps much 100-150k; I have not invested or fixed yet so this is a total guesstimate)
The neighborhood looked quite beat-up and about 10% houses in a quarter mile radius have broken walls, plywood patched windows, and/or rusted cars parked. Again 10-20% are well kept (the kind that has well-kept gardens and potted plants outside).
It's the corner row of houses next to a railroad (fixing the properties will make the road much more livable and appear safer)
trees/bushes/grass is overgrown; seems like a cheap fix
current tenants have kept the property quite bad: trash outside, broken windows and from the looks of it, perhaps, trashed the place inside too. Looks like a drug friendly block.
it looked like a 4plex+3plex+3plex
I live 5 hours away from the property

I am going to find a hard money lender to purchase and rehab; the seller is also providing hard money financing for the purchase and rehab.

I am looking for advice on how I can successfully proceed in this investment journey and things l will need to look out for as a first-time investor. I am sure I have missed out information here and will be more than happy to provide it!

Cheers and thanks!

Milind

Hate to sound like a negative Nancy, but if you are a first time investor, its a very big project for you to take on. Who is going to manage these properties. You will have to find a really good PM and then able to manage the PM.

If you want to get involved in this, I would suggest a JV of some kind with a seasoned investor. Also, need to ask if these are Section 8 or just regular tenants?

Thanks Chimay, I'm yet to work out a JV partnership and I do realize the value it will have for me. Keeping my mind open.

0 Reply

Milind Shastri

OP

Investor · Allen, TX · Member since 2016 · 104 posts · 37 votes

9y

Originally posted by @Andrew Johnson:

Milind Shastri I don't know Baytown at all, never been there, but based on what you're saying it sounds like a "D" neighborhood. I'm guessing that after putting $100K into it (the lower side of your estimate) you'd still get the same rents. Why? Who would want to pay more to live in that neighborhood? They'd just pay the same raised-rent to live 1/2 mile away in a better area. Not to mention that when the seller says anything about an ARV value, take it for the grain or salt that it is. If the owner thought that putting $100K into rehab he could get $300K more on the sale price (netting $200K) he would do it.

The scary part is that I could be right...or wrong. You could be right...or wrong. Other people chiming in could be right...or wrong. Here's the salient point: it's your first time so if you can get approved you'd better believe it will be a full-recourse loan. Which means, if you're wrong you don't just lose your original investment, you're on the hook for entirety of the loan.

Anyway, not advocating a "yes" or "no" just tossing out some perspective.

Yes, you are right to point out the risks on the loan Andrew. On any other day I would have skipped to the next property but just felt that, 'maybe', there could be some potential here. Feel like digging a little deeper on this one and understanding this case better.

I agree with you about taking the seller quoted ARV with a grain of salt. He's calculated it based on a 9% cap rate in the area and 50% rent improvement! Btw, is there any resource to find cap rates in a neighborhood that you know of?

0 Reply

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

9y

@Milind Shastri I don't know of any *reliable* way to find a cap rate. If I was in your shoes I'd ask a few commerical brokers in your area. Maybe head to an REI meeting in your area. You'll get a variety of opinions but odds are you won't have on person saying 5-cap and another saying 10-cap. Others may have better ways. I do, however, lend a little less emphasis on cap-rate than others. It puts a 1917 property in the same block as a 2017 build. I have a hard time treating those two properties as equivocal.

0 Reply

Milind Shastri

OP

Investor · Allen, TX · Member since 2016 · 104 posts · 37 votes

9y

Originally posted by @Andrew Johnson:

@Milind Shastri I don't know of any *reliable* way to find a cap rate. If I was in your shoes I'd ask a few commerical brokers in your area. Maybe head to an REI meeting in your area. You'll get a variety of opinions but odds are you won't have on person saying 5-cap and another saying 10-cap. Others may have better ways. I do, however, lend a little less emphasis on cap-rate than others. It puts a 1917 property in the same block as a 2017 build. I have a hard time treating those two properties as equivocal.

Great points. Thanks!

0 Reply

Daniel Baker

Real Estate Investor · Painesville, OH · Member since 2017 · 29 posts · 15 votes

9y

Hello Milind

I am Fairly new in Real Estate - mostly flipping, so you can take what I have to say with a grain of salt, but have you asked yourself the question, why would someone walk away from something that has such good cash flow. Does this person have back up for this 40 k NOI, From a PM standpoint, if I were a PM and you were asking me to manage a property (this property) that was like a war zone, I would be charging you a premium to manage these property's ,if you can find someone at all.

What about finding contractors to do the work on those properties. As a contractor myself I can tell you that it will not be easy for you to find good contractors to do the work you need done on those properties if you choose to take on this project, what about insurance, etc. You will pay a premium for everything you want to do on this property for all the wrong reasons.

I don't mean to sound like a pessimist but if you get a hard money lender involved and you need to get repairs done you will be hiring a GC to coordinate the repair work, a good one will get the repairs done in time and within budget, a bad one can force you to go over budget, cause delays, etc. You may want to look for a hard money lender who could be flexible on their terms.

Anyways,

Good luck with whatever you choose to do.

1 Reply

Milind Shastri

OP

Investor · Allen, TX · Member since 2016 · 104 posts · 37 votes

9y

Originally posted by @Daniel Baker:

Hello Milind

I am Fairly new in Real Estate - mostly flipping, so you can take what I have to say with a grain of salt, but have you asked yourself the question, why would someone walk away from something that has such good cash flow. Does this person have back up for this 40 k NOI, From a PM standpoint, if I were a PM and you were asking me to manage a property (this property) that was like a war zone, I would be charging you a premium to manage these property's ,if you can find someone at all.

What about finding contractors to do the work on those properties. As a contractor myself I can tell you that it will not be easy for you to find good contractors to do the work you need done on those properties if you choose to take on this project, what about insurance, etc. You will pay a premium for everything you want to do on this property for all the wrong reasons.

I don't mean to sound like a pessimist but if you get a hard money lender involved and you need to get repairs done you will be hiring a GC to coordinate the repair work, a good one will get the repairs done in time and within budget, a bad one can force you to go over budget, cause delays, etc. You may want to look for a hard money lender who could be flexible on their terms.

Anyways,

Good luck with whatever you choose to do.

Thanks for the insights and perspective. These definitely important points to consider. I will keep be discussing the terms with the lender. Finding a good GC is seeming a bit tricky. Let's see how it turns out.... :|

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Fixer upper in beat up neighborhood. NOI 50k

Fixer upper in beat up neighborhood. NOI 50k

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