What do you think of this deal?

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What do you think of this deal?

Tyler Smiarowski
Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes

Here it is:

Purchasing 7plex with 6 garages for 195k. Located in historical district of Cedar Rapids surrounded by mostly commercial property and a brand new medical facility.

Bank is lending 177,600 and I am having the seller carry a 2nd of 17,400 amortized over 20years @ 5% with a 5 year baloon. So I am not putting any money into the deal.

Income:

Rents - $2895 per month

Laundry - $80 per month

Garages - $220 per month

Total Income - $3195 per month

Expenses: Total $2400 which includes $162 per month of maintence factored in.

Net cash flow per month is $795. Current rents are low for the market, easily will be able to increase rents by a total of $250 per month and reduce property taxes from $558 per month to $300 once I co op the properties, which I have done with my other properties. Based on the figures my projected net cash flow would then be $1345.

Just wanted to get some opinions on this. I am closing on this Nov 4th. This will be my 6th multi family property for a total of 23 units.

Thanks, Tyler

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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
12y

only using actual current costs is not going to give you a real life and accurate amount. You are not accounting for expenses that do not occur on a regular monthly basis. Your 5% for both repairs and vacancies is not even enough for vacancies alobe. The 5% unemployment rate in yoyr area does not equate to vacancy levels. Doing maintenance and management yourself may increase your cash flow but it is a job and when you sell, your buyer may likely hire it out and base the expenses on the property. You are cheating yourself in the long run using your format.

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  • Jared Stasch
    Salem, OR · Member since 2013 · 8 posts · 0 votes
    12y

    Tyler,

    How did you come up with $195,000 as your purchase price?

    0Reply
  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    195k is what I offered. The appraisal came back from the bank and it came in at 222k. Original offer I made was 175k but owner's bottom dollar was 195k. He has owned it for 43 years and it is in excellent shape..well cared for property.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    Between your two loans, what is the total monthly debt service? I assume you lumped that in with the operating costs in your total expenses figure of $2400. I am curious how much of that is debt service.

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  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    $1123 on the first. $116 on the 2nd. Total of $1339.

    0Reply
  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    Correction. $1239 total debt service per month.

    0Reply
  • Paul CoxPro Member
    Rental Property Investor · Manassas, VA · Member since 2013 · 193 posts · 156 votes
    12y

    Tyler,

    What does it mean to co op your properties? Also what method did you use to come up with your initial offer price of 175K? Sounds like you already know what you're doing based on the number of units you now have, but thanks for sharing for us new investors.

    Paul

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by Tyler Smiarowski:
    Correction. $1239 total debt service per month.

    So you have allocated $1161 monthly to all expenses other than debt service which is only 36% of the gross income. That sounds very low compared to the average. How do you expect to sustain a long time average of only 36% expense ratio on this?

    The expense ratio will typically be higher and based on 50%, your cash flow for 7 doors would be $361 total or $51.57 per door which is very low.

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  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    I did not allocate..they are actual expenses.

    $558 property taxes (will be approx. $300 once I co op them)

    $114 property insurance

    $165 for gas

    $30 for common electric

    $60 for garbage

    $75 for water

    $159 for maintenance/vacancy (5%)

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  • Andrew S.
    Investor · Raleigh, NC · Member since 2013 · 1k+ posts · 708 votes
    12y

    @Tyler Smiarowski I'm new at this myself, so I let others comment, but I am interested in your "co-op" comment. What is that?

    Also, yours must be one heck of a market, if you only need to allow 5% for vacancies AND maintenance though. I tend to assume more than that for vacancies alone.

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  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    Paul,

    Thanks for asking about the co op. This is something that seems to me to be very popular here in Iowa due to commercial property being taxed at the full assessed amount. I don't hear much about it any where else. Many investors I know when purchasing a multi family that is 3 units or more will either convert the buildings to condo's or co op. Converting to condo's is not as popular due to having to meet local building codes...basically cities now make it very difficult to do so. To co op is just putting the building into a cooperative...I have a lawyer do this and they do all the paper work, etc. The main purpose of this is to reduce property taxes...since you go from a commercial status to a residential status...usually saving around 40% to 50% in taxes.

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  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    Andrew

    Here in Cedar Rapids the unemployment rate as of July 2013 was 5.1%. I manage my properties myself...doing about half the maintenance and all lawncare, etc so maybe that's while I have it at 5%, also I work full time as a CPA so I guess I stay busy. This particular property will not have any significant capital expenses within the next 8 years. Roof is good for another 10-12...boiler is new as of 2009, etc. Also this property is in a prime location...a few blocks from downtown and surrounded by 3 hospitals etc. I have 16 units as of now and have been fully occupied for the past 4 months. Usually at most I have a unit sit empty for about 2 or 3 weeks at the most. I don't have a "system" but I stay on top of things and probably benefit from a strong local economy.

    0Reply
  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    Below is a link better explaining the co ops. Here in Iowa this actually went to the state supreme court. Hope this helps.

    http://thegazette.com/2011/08/02/iowa-supreme-court-rules-for-housing-co-ops/

    0Reply
  • Deon Wynia
    Real Estate Investor · Sioux Center, IA · Member since 2013 · 11 posts · 0 votes
    12y

    Tyler,

    Thanks for the article. I am in Iowa as well and had not heard of this before. Sounds like you know your market and your expenses well. If those numbers hold up and you are able to increase the NOI as you plan, you will not only be benefiting from cash flow but also appreciation.

    The NOI you have spelled out to start with would be right around $24,000/yr. At a 10% cap rate you would expect to pay about $240,000 by an income valuation. So you are looking at a 12% cap rate at $195,000. Your changes to improve cash flow would increase your NOI to @ $31,000. That would make it a 16% cap rate which is really good.

    Based on income valuation, if the standard cap rate in your area is around 10% that property would be worth $300,000 after your changes, really increasing your equity and position of safety if you should want to refinance in the future. And considering that you have no money into the deal you are getting awesome return on investment.

    All that is based on the soundness of your numbers but the numbers look really good!

    0Reply
  • Justin S.
    Investor · Cedar Rapids, IA · Member since 2013 · 46 posts · 12 votes
    12y

    Tyler, you should talk to a real estate attorney about co-oping in Cedar Rapids. They have changed the laws, so you can't co-op unless it has a sprinkler system and a couple other things. Previous co-ops do not have to be changed, but co-oping old buildings is now VERY difficult.

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  • Justin S.
    Investor · Cedar Rapids, IA · Member since 2013 · 46 posts · 12 votes
    12y

    Also, the maintenance/vacancy budget is absurdly low. You will have vacancies, repairs, non-paying tenants, updates, etc. Even if two of the big items are done, you still have 7 air conditioners, 7 stoves, 7 fridges, etc. In CR/Marion I usually use 5% vacancy and about 8 - 10% for repairs, especially in the first 1 - 2 years of owning a property.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    only using actual current costs is not going to give you a real life and accurate amount. You are not accounting for expenses that do not occur on a regular monthly basis. Your 5% for both repairs and vacancies is not even enough for vacancies alobe. The 5% unemployment rate in yoyr area does not equate to vacancy levels. Doing maintenance and management yourself may increase your cash flow but it is a job and when you sell, your buyer may likely hire it out and base the expenses on the property. You are cheating yourself in the long run using your format.

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  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    Justin,

    Can you refer me to something that indicates this? I know of at least one person that has done a co op in the past 8 weeks or and I know for sure they don't have a sprinkler system, etc.

    0Reply
  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    Justin,

    I had two coops done earlier this year in Marion..I just texted someone about the issue....about 99% sure nothing has been done in CR to detour co oping...my lawyer at Riley and Bradley didn't mention anything either a few weeks ago..\

    What kind of stuff do you do in the area? do you rehab and then rent out? Glad to see some local people on the site.

    0Reply
  • Justin S.
    Investor · Cedar Rapids, IA · Member since 2013 · 46 posts · 12 votes
    12y

    I rehab and rent out, but also own a number of multi families and commercial. I will talk with my attorney again, but last I heard there were some new issues. What happens is that you file the paperwork, but when you actually get your taxes they will see if you meet the new criteria. The process of filing the co-op is very easy, but if it actually converts to residential on taxes in 2014 is the big question.

    I heard CR and Marion were losing so much from co-ops that they made it much more difficult, and many other areas are doing the same. Feel free to message me when you get a guaranteed answer.

    0Reply
  • Justin S.
    Investor · Cedar Rapids, IA · Member since 2013 · 46 posts · 12 votes
    12y

    I have to completely agree with Will here. 5% doesn't even scratch the surface for vacancies, and repairs will never be lower than that in the long run.

    0Reply
  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    Justin,

    I don't see how they could do that since when the assessor's office receives the info on the co op in order to change the classification from commercial to residential which is done on the front end of the process.....then 18months down the road say "oh by the way you need to comply with such and such". When I did the coop on my Marion properties it initially got held up because the building codes supervisor indicated that they needed to meet building codes....which is completely false because Marion has nothing in their code indicating this. Once my lawyer followed up it was fine.

    0Reply
  • Justin S.
    Investor · Cedar Rapids, IA · Member since 2013 · 46 posts · 12 votes
    12y

    When you file a co-op, all you do is register for a new Tax ID, and then submit a name change to the assessors office. As of right now, the assessor still considers your buildings commercial (feel free to call and ask them). The change from commercial to residential happens when they cut statements at the beginning of 2014, it does not happen when you simply file a name change.

    Don't shoot the messenger here, I'm told the exact same thing you are. That the city requires you to meet current building codes in order to be considered a co-op, and current building codes mean sprinkler systems among other things. I obviously hope you and your attorney are correct, that the buildings don't need to be updated but just keep in mind that just because you've filed paperwork and your name has been changed on the assessors site, that does not mean you are home free yet.

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  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    Not trying to shoot the messenger. The co ops I have in Marion have already been changed to residential status....this happened when the assessor's office received the info back in January or whenever they received it.

    0Reply
  • Ellis San Jose
    Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
    12y

    I have to agree with Will Barnard. You need a greater operating expense cushion. You will run into trouble using the existing tight numbers. Great job in uncovering the opportunity, but it sounds like more negotiation is needed with the seller. You can still offer his price.

    0Reply
  • Tyler Smiarowski
    OP
    Accountant · cedar rapids, IA · Member since 2013 · 99 posts · 46 votes
    12y

    I plugged in some new numbers...using 5% for vacancy and 9% for maintenance and using current income and expense....this comes out to a cap rate of 10.45% based on the purchase price. What do people shoot for when calculating cap rates?

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