Real Estate Deal Analysis & Advice

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James Roberts
  • Sacramento, CA
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[Calc Review] Help me analyze this deal

James Roberts
  • Sacramento, CA
Posted Nov 1 2022, 11:51

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Hello BP forum. We are a design/engineering/build firm located in Sacramento, CA.  Frankly, with the market shift, volatile material costs, risk, etc. we have decided to not build for "end-user clients" anymore and put ourselves in the "client" position.  This is our first BP property report on a real BRRR project that we have access to.  Please look this over, pound us with questions, and let us know where our #s are right/wrong.  We have an investor meeting this Thursday (in 2 days) and would like to get this report polished up as best as possible.  

Thanks in advance.  James

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Alicia Marks
  • Fort Worth, TX
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Alicia Marks
  • Fort Worth, TX
Replied Nov 1 2022, 12:46

Here are a few things I see. If this is in California I'd do a slightly high vacancy percentage. It can take longer there to evict if necessary. 12% management looks a little high, but it depends on the area and if it is short or long term rental. I would also check on the loan rates. It strongly depends on the type of loan and property. If acquisition is on hard money, you're looking at 10-12% IO easily. At refinance, DSCR loans are closer to 8%, but even regular investment loans are likely closer to 7% at the moment. I also see that there is a line for utilities. If this is a SFH, tenant should pay. If it's MFH, I'd strongly consider separating utilities wherever possible. Tenants with utilities included rarely conserve and cost more than it's worth. Is your rental rate accurate? You'll want to show comps supporting. If that's the case and these other aspects are tweaked you'd look fairly solid.

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James Roberts
  • Sacramento, CA
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James Roberts
  • Sacramento, CA
Replied Nov 1 2022, 14:59

Thanks Alicia for the prompt reply.  Couple points...

1) We will be leasing mid-term to traveling medical staff and tenants will be placed by an agency. We do expect a revolving door which should keep the vacancy low. 
2) There are (2) SFRs on the property and the rooms will be leased individually, which is why the rental rate is higher. 
3) The plan for utilities is to provide all utilities with a monthly electrical and gas limit.  If the limit is exceeded, the tenant will pay the difference.  
4) Our downpayment will be from our hard-money investor.  The plan would be to refi once the reno is complete and the tenants are placed. About 2-4mos from closing.  

With the #4 finance plan, % should be expect LTV and what would be the best path for refi cash-out to pay back the hard-money?

Thanks! James-

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Alicia Marks
  • Fort Worth, TX
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Alicia Marks
  • Fort Worth, TX
Replied Nov 1 2022, 15:12
Quote from @James Roberts:

Thanks Alicia for the prompt reply.  Couple points...

1) We will be leasing mid-term to traveling medical staff and tenants will be placed by an agency. We do expect a revolving door which should keep the vacancy low. 
2) There are (2) SFRs on the property and the rooms will be leased individually, which is why the rental rate is higher. 
3) The plan for utilities is to provide all utilities with a monthly electrical and gas limit.  If the limit is exceeded, the tenant will pay the difference.  
4) Our downpayment will be from our hard-money investor.  The plan would be to refi once the reno is complete and the tenants are placed. About 2-4mos from closing.  

With the #4 finance plan, % should be expect LTV and what would be the best path for refi cash-out to pay back the hard-money?

Thanks! James-


 Make sure to check MTR demand in your area. Many hospitals are cutting back on travel nurse placements. It may be a good opportunity for patient families though. Placement services would mean a lower vacancy is likely, so that number can probably stay. How will you place responsibility for the utility cap? Do the additional charge fall on the placement service, or divided among the tenants? Hard to justify to the person who doesn't leave their window open and the heat on, so make sure it's spelled out very clearly. 

You'll need to find a company that will ignore seasoning periods. Typically it's 6 months minimum. That greatly limits who you can use and possibly the rates available to you. If you can hold on and refinance at 6 months you have more options, but run the risk of even higher rates. Most investor loans are looking for 25% equity minimum right now. You can find 20%, but it will again cost you. 30% gives better rates.

Additional question- shared common spaces can be a real problem in regards to shared responsibility. I'd recommend eating into the profit slightly to have a cleaner come once per week so their's less roommate issues. Small price to pay for you to have less headaches. Check out this episode for great ideas in making solid shared housing systems. https://www.biggerpockets.com/...

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Michael Hyun
  • Investor
  • San Jose CA
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Michael Hyun
  • Investor
  • San Jose CA
Replied Nov 1 2022, 19:43

If mid term rental is the only option, I'd be very careful with this deal. Run a report for what you could get if it wasn't a mid term rental.

You assume you'd get 6.50 interest in two months from now. I think that's also a bold assumption. I'd assume 7.5, and I'm not even sure if thats conservative or not. Just look at the difference between rates two months ago and what it is today. 

Each home making 4k a month is pretty insane. I hope that rental number is accurate.

If you're willing to manage 2 SFHs, leasing the rooms out individually, I'd urge you to take a look at STRs. Look up the STR Loophole. The tax benefits could be a game changer for you.



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Tim Herman
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Tim Herman
Replied Nov 2 2022, 08:27

@James Roberts Taxes will be a lot higher due to prop 13. Figure 1.25% of purchase price or $655 per month. Have you run capex and rehab budgets or just guessing what you need to save. Without more information no one can tell if you are saving enough. Are each houses 1 bed/1bath houses or 10 bed/10 bath houses. Each will have a different repair and capex budget. Feds are meeting discussing inflation and expect to raise the prime up an additional 3/4 to 1%. Mortgage rates will follow.  If you haven't locked in a rate expect 8%  or higher in 6 months. A 5% vacancy is the equivalent of your tenants staying an average of 20 months. 5/100=1/20. Unlikely a mid term rental will only be vacant 1 month out of 20.Will you rehab the rooms between turnovers. You realize you will have to bring more money to the closing table. Initial purchase you are taking a 503k mortgage and refi a 490k. 

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James Roberts
  • Sacramento, CA
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James Roberts
  • Sacramento, CA
Replied Nov 2 2022, 21:47

Thanks again for the reply. I will bullet replies for simplicity. Please do not take any of this with arrogance... We have done a lot of work with the medical market and we both live in the same neighborhood. Our primary need is to understand the best path of securing the financing outside of the downpayment. We do plan to put the properties under a LLC. But how do banks look at a new LLC, but with a track record of construction?

1) Travel nurse demand.  Sacramento specifically has (3) major medical expansions near downtown.  This propoerty is blocks away from the largest medical tech-center expansion in California history.  
2) The wife of one of our partners is a carer travel nurse.  We have the inside track on space and amenity requirements from her and the agency she is with.  Very helpful:)
3) You have a good point with the utility overage potentially being a conflict.  I brought this up with our nurse contact and she said that many nurses travel together.  They are professional adults and it should not be a problem for the nurses to share the accountability.  Basically, with the utility overage term in the agreement, it becomes the tenant responsibility to watch their usage. 
4) The medical industry does not have "seasons" and realistically all 4 seasons in Sac are in demand because of the surrounding outdoor adventure destinations.  Regardless, 13-26wks contracts will be own primary focus with a backup of business and vacation travelers. 
5) We have a personal contact investor so the hard-money term for the down payment and reno$ will be 10%. We are a deign/engineering firm and has been building for clients for decades... reno and new construction is the easiest part for us.
6) Great point on the cleaning budget.  It provides a mild level of visual security as well.
7) Other amenities will include low-cost bicycles and e-scooters (damage/loss deposit required), and off-street parking for this that doe bring vehicles.

To Michael's point, we re-ran the report using 7.5%, reduced the monthly to LTR rates for the immediate area.  It still cashflows with $800-$900 p/mo.  This will sustain the initial investment and will buy time to complete the SB9 lot split.  

Once we have has the SB9 complete, another primary with a 2-plex or 4-plex ADU. This will provide up to 5 additional rentals. I understand this sound aggressive, but the area calls for doors and MTR units.

If a conference call is available, I would definitely be up for that.  I am sure there is additional detail needed.  I know I have additional questions.

Engineer

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Richard Goore
  • Realtor
  • Sacramento, CA
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Richard Goore
  • Realtor
  • Sacramento, CA
Replied Nov 3 2022, 06:57

Following.  Very interesting.  Thought about something similar with a clients property near UCD but didn’t pursue.  

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James Roberts
  • Sacramento, CA
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James Roberts
  • Sacramento, CA
Replied Nov 3 2022, 11:29
Quote from @Richard Goore:

Following.  Very interesting.  Thought about something similar with a clients property near UCD but didn’t pursue.  

Hello Richard. You see where Sac is and where the medical expansion is going here. We have built shipping container and steel frame ADU's in the Oak Park area for clients and now we are building our own as well. I am currently putting a 2/1 primary and 1/1 ADU in S. Oak Park; both container homes.

If you run across any land-deal/development opportunities, let me know?  We are hunting.


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