3-plex numbers look great - what are we missing???

9 Replies

My partner and I have a 3-plex under contract in Ontario, Canada. Asking price was $179K; contract is $160K; CoC = 30%; gross revenue = $24.6K. My partner wants to wholesale it because it's in a market that we aren't familiar with, but I am more inclined to want to hold it given the numbers. We rarely see these kinds of numbers and I hate to pass it up, but financing might be a bit challenging. Here are my questions:

1.) These numbers are great. We have true expenses and income, the contract has all the right clauses to protect us, and the seller and real estate agent seem to be above-board. Do good deals like this really happen or should I start being suspicious? (I'm asking because we just haven't seen these numbers nor been successful in getting them under contract... until now.)

2.) We'll need creative financing to get this one going. Has anyone ever put together a hybrid hard money lending/joint venture deal?

3.) The property itself isn't all that "pretty"... But it does present as a solid performer in a good location and it has good tenants. Should we even be worried about the external look of the property as long as it's structurally sound and generally maintained?

4.) If we go the wholesale route, what's the best way to very quickly find potential investors? We only have a small network built to date and need some ideas to significantly - and quickly - expand our connections. Would really value advice on this.

Many thanks!

@Tanna Brodbar something's missing in your calculations. 24.6k/160k =15.375% (gross numbers) and using the 50% rule to ball park the expenses, your estimated NOI=12.3k and that gives an estimated Cap rate of 7.69%. I don't see the screaming good deal on this one with the numbers you've given.

Agree with @Robert Leonard  . Having said that, the 50% rule is a rule of thumb and not "gospel". There are properties with expenses less than 50%. But to Robert's point, you are not factoring in the expenses (and there are always expenses). You have to give a breakdown of ...

Taxes

Insurance

Management

Maintenance & repairs

Utilities

Reserves

Then you can really determine what the NOI is - and therefore what the Cash-on-cash return really is.

You can use my Cashflow Analyzer to analyze this deal or any deal you may have:

http://beta.biggerpockets.com/files/user/Mister4cl...

@Tanna Brodbar  

My math concurs with @Robert Leonard  and @Wendell De Guzman . That said, depending on where in Ontario this property is located ~7.5% CoC may be a relatively strong return to the market as a whole.

Is the property fully rented now? If not, how much immediate CapEx is required to get it performing? Is there upward room for rent in the local market (i.e. is the property a lingering artefact of rent control)? Who are the clientele?

Unless you have room to increase revenue, the return does pale in comparison to what folks are seeing on the rust belt on the other side of the Great Lakes, but it looks fine when stood alongside the over-heated mess that is Toronto these days.

1(506) 471-4126

Thanks to all for your replies. You're right, we didn't factor in for maintenance & repairs or reserves. That is what is off. A BiggerPockets colleague who knows this area has provided additional insight (thanks, Dave!) and it sounds like we need to take a close, hard look at it. Robert, we used actual expenses vs. estimate, and they were lower than 50%. But again, we didn't account for reserves. Roy, looks like there is no room to increase revenue so that's out. Wendell, many thanks for providing your analyzer!

@Tanna Brodbar  , it's certainly nice to use "actual" expenses that the seller provides, but keep in mind that they may not have been as diligent about repairs and maintenance as they should have been. This may be why the expenses are low and the place doesn't look so great right now.

As far as reserves, try to make up your own actual numbers for things that have a fairly well-defined lifespan. For example:

Roof: $10,000, 240 month life = $42/mo

Water heater: $1000, 120 month life = $8/mo

AC...

Furnace...

etc

Originally posted by @Michael D.:

@Tanna Brodbar  , it's certainly nice to use "actual" expenses that the seller provides, but keep in mind that they may not have been as diligent about repairs and maintenance as they should have been. This may be why the expenses are low and the place doesn't look so great right now.

Or they are simply lying to move a pig!

Tanna:  Say Hi to Mr Vogt and ask him where he's been hiding ;) 

1(506) 471-4126

@Tanna Brodbar  what did you end up doing with the 3-plex?

@Roy N.  Mr. @Dave Vogt  has been in hiding. Looks like he is up to something big. And Roy are you in Toronto anytime? Would love to connect.

This is awesome advice and insight. I have so much to learn.

Originally posted by @Ajay Kahlon:

@Roy N. Mr. @Dave Vogt  has been in hiding. Looks like he is up to something big. And Roy are you in Toronto anytime? Would love to connect.

 Ajay:

I was "close" to TO a month ago while driving from Calgary to NB with my son, but decided to turn east in the Muskokas and travelled across Bobcaygeon country ... old VW campers don't care for 400-series traffic.

1(506) 471-4126

Join the Largest Real Estate Investing Community

Basic membership is free, forever.