First Timer Struggling with the Math
Hi, I am a first time buyer looking to break into the rental market. I have been looking at multi families for about 6 months now and the one building I want to make a move on has so many variables that I am having a hard time with the math. The building has 10 1br/2br units and 3 store fronts. It is a great location in a small town that really appears to be on the rise. The price is $320,000 (the owner won't negotiate) but the building needs extensive work. 2 of the apartments are partially gutted and need renovation. All the store fronts are empty and need to be completely renovated (plumbing, electric, heating, renovation). The building needs roof work and extensive work on the outdoor staircase which is the second means of egress. The building has many open violations, mostly due to the abandoned store fronts and to water leaking into tenants apartments from the roof. I have received estimates of $250,000 to cover most of the repairs. This however does not cover future renovations to the other 8 apartments and one day to redo the whole roof. I have an investor/friend that would pay cash for the building and then we would take out a construction loan for the $250,000 for the immediate repairs. Our mortgage payment for the loan would be $1,400 a month. The building currently brings in $4,875 a month. The current rents are low for the area because the building is such a mess. I understand that the first couple of years would be tough but once I start to add in the apartments that get renovated and then store fronts my monthly income jumps to $8,875.
So when I do the math with this number $8,875 monthly income with a 5% vacancy rate and 30% operation expenses + my mortgage ($1,400) for the construction loan my cash flow total is $4,502 a month which I split with my investor. Again I have not calculated for the undervalued rents but I want to be conservative but the hope is that number would eventually be $10,000 a month or more.
So finally for my question. When so much work is needed how does one look at the math? In my area (even with all the renovation costs) this seems like this is the best deal I can find. In my eyes all the renovation costs will be paid from the proceeds of the building so it only becomes a factor when I want to sell?
And my second question (i know a lot of this depends on me) but is this just too big of a project for a first timer to handle?
Thanks for any input. I know this is a long post.