Help on deal analysis

11 Replies

Hey, guys hope everyone is having a good day. I need some help on an off-market deal I got from a bandit sign.

The home is question is about 1mi from EMU in Ypsilanti, MI

The home is a 6bd 2.5ba at about 2000sqft.

Gross rents are $500 per room so $3000.

Overall the home is in good condition and just needs a few grand of work.

The guy bought the home and did a lot of work in '12. It was rehabbed then and the basement was also redone and he added 2 legal bedrooms down there.

So the issues I'm having is how the heck do I comp this type of property? I am looking to wholesale it so would a potential landlord want to rent it out per room? The other issues I can see is the fact that he has just a verbal month to month lease. No background checks or anything.

With a bit of work getting the people leased up and such this thing could cashflow really well! Just need some input.

Thanks, BP peeps

Originally posted by @Adam Spencer :

Hey, guys hope everyone is having a good day. I need some help on an off-market deal I got from a bandit sign.

The home is question is about 1mi from EMU in Ypsilanti, MI

The home is a 6bd 2.5ba at about 2000sqft.

Gross rents are $500 per room so $3000.

Overall the home is in good condition and just needs a few grand of work.

The guy bought the home and did a lot of work in '12. It was rehabbed then and the basement was also redone and he added 2 legal bedrooms down there.

So the issues I'm having is how the heck do I comp this type of property? I am looking to wholesale it so would a potential landlord want to rent it out per room? The other issues I can see is the fact that he has just a verbal month to month lease. No background checks or anything.

With a bit of work getting the people leased up and such this thing could cashflow really well! Just need some input.

Thanks, BP peeps

Be very careful over by EMU. Prices change very quickly block to block (I assume you know this as you're from Ypsi). Not a lot that goes for over low $200s no matter how big.

But if it truly is cash flowing $3k/month and you can get it for $150k or less, seems like one you may want to keep.

Comps generally would be on an income basis for this type of property. I don't know Ypsi but I'd assume the cap rate you'd want to shoot for there would be 10+%. 

Originally posted by @Adam Spencer :

Hey, guys hope everyone is having a good day. I need some help on an off-market deal I got from a bandit sign.

The home is question is about 1mi from EMU in Ypsilanti, MI

The home is a 6bd 2.5ba at about 2000sqft.

Gross rents are $500 per room so $3000.

Overall the home is in good condition and just needs a few grand of work.

The guy bought the home and did a lot of work in '12. It was rehabbed then and the basement was also redone and he added 2 legal bedrooms down there.

So the issues I'm having is how the heck do I comp this type of property? I am looking to wholesale it so would a potential landlord want to rent it out per room? The other issues I can see is the fact that he has just a verbal month to month lease. No background checks or anything.

With a bit of work getting the people leased up and such this thing could cashflow really well! Just need some input.

Thanks, BP peeps

 This depends on the buyer.  There are a number of ways to do this, but again, it depends specifically on the buyer...and what their specific use will be.  It's guaranteed that it will be a room rental, but there are a number of different ways to do that in that area.

I don't see an asking price, so it's hard to answer your question without that starting point.  Also, what position is the seller in as far as need/want to sell?  Are they selling because they want to get their equity out, or are they into this deal too high with that "...lot of work done in '12"?  Also, I'd verify those "legal bedrooms" in the basement are in fact legal.

What type of basement does this property have?

Also, and this is a huge one, what does "about a mile from EMU" mean. The closer you are to that "mile", the less likely you will get $500/room...if you can fill the rooms at all at that distance.  Depending on which direction, which block, which section of town, and what micro-market you are talking about, that "$500/room" could be imaginary.

@Joshua Birk Yeah I know it is really crazy how varied the prices are around there.  Do you invest in Ypsi? I was thinking the same thing as far as comps go. It seems like it would be based more on the income that its producing.  

@Joe Villeneuve The asking price was at $190k. I talked him down to $173K and I think the comps support an ARV at about $200k or a little above. The reason he is selling is to cash out so he can purchase a house where he lives now in Farmington Hills. Joe, you have a good point about the basement bedrooms being legal. He says all the work was done by professional GCs and all the permits where pulled. Could I just call the city and find this out?

Google says the home is .7 Miles from EMU.  You are right that I will make a big difference in student rentals.  He currently has all young professionals so I think it just varies in that area.  I live on Ainsworth and have not had many issues renting out my spare rooms.  

Thanks for all the input guys its good to hear other point of views

Hi, in regards to the comps, you could compare revently sold by $/SqFt and compare to what you are getting. I hope that hepls. Good luck!

@Chuks Erinne that is kinda what my realtor said. Its hard to compare sqft for a basement but you can get a good idea comparing cost per sqft.  

Originally posted by @Adam Spencer :

@Joshua Birk Yeah I know it is really crazy how varied the prices are around there.  Do you invest in Ypsi? I was thinking the same thing as far as comps go. It seems like it would be based more on the income that its producing.  

@Joe Villeneuve The asking price was at $190k. I talked him down to $173K and I think the comps support an ARV at about $200k or a little above. The reason he is selling is to cash out so he can purchase a house where he lives now in Farmington Hills. Joe, you have a good point about the basement bedrooms being legal. He says all the work was done by professional GCs and all the permits where pulled. Could I just call the city and find this out?

Google says the home is .7 Miles from EMU.  You are right that I will make a big difference in student rentals.  He currently has all young professionals so I think it just varies in that area.  I live on Ainsworth and have not had many issues renting out my spare rooms.  

Thanks for all the input guys its good to hear other point of views

 I have property north of you and south of EMU.

Now, for the bad news.  I'm looking t the number and I see a negative cash flow as the deal stands.  With a little creativity that could change though.

First, based on a daily rental base, you are looking at a higher vacancy rate than a monthly rental, so the idea that has no vacancies, is a mirage.

2nd, I would have the seller do the rehab and provide a CoO before he hands it over to you.  Your cost to buy would go up, but it would be less out of pocket and there would be noe surprises in cost from the rehab.  This would also validate those "basement bedrooms".

3rd, you need a partner to provide the cash up front.  Then you need to get control of the property using an alternative strategy to a direct buy.  There are a number of them that could work, depending on the numbers and what the required financial exit goals are of the seller.

Can one get home insurance on student leased home? Parking for 6 tenants?

@Adam Spencer .  I don't know you well enough to assume but I'm wondering if you've considered the overall student rental market in Ypsi/EMU.  Right now, the school is suffering from less enrollment than previous years.  The school is reaching out to students overseas to fill the gap.

Student rentals/rooms are going to be a lot harder to work with in the short-term.  I will not speculate to the long-term but I have heard some stories about small room sizes and Ann Arbor.  I was looking at deals like yours when I first moved to the area and ran into the same problem.  Now with five units by myself, I would hate to manage any more.

@Phillip Dougher This is good to know as I was unaware of EMU suffering from low enrolment.  This house did not work out as Ypsi would not give us a CofO on this.  A side note is all 6 people living there are professionals.  I have 2 young professionals in my home near Downtown Ypsi as well.  

That does seem to be the trend around Ypsi right now.  My tenants all work in Ann Arbor but live in Ypsi.   It makes for a much better environment than dealing with students.  Good to see this trend is also going towards one bedroom places.  I did not realize this.  

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