Possibly too good to be true, help me see what I may be missing.

Real Estate Deal Analysis & Advice
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Possibly too good to be true, help me see what I may be missing.

Jonathan G.Pro Member
Investor · Tyler, TX · Member since 2014 · 96 posts · 22 votes

I just wanted to post a deal on here that I just recently came across.  I am new to Bigger Pockets and would like any advice at all when it comes to looking at this deal.  It seems to be way to good to be true.  I have run several different formula's as a first step (50%, 2%, 1%).  The next would be to pop all numbers in in the Rental Properties Calculator on BP.  Then I would probably go take a look at it.  It just shows so much cash-flow I am not sure why they are selling it for so low, and why it is not gone yet.

Before I do anything else I wanted to post the info on here for everyone and anyone to chime in.  Any help that you would offer in regards to looking closer at this deal I would much appreciate it.  If I forget to leave anything out in the initial post please feel free to ask me for any important information that I may be leaving out.

DEAL

12 Units with 1bedroom/1bath rent is listed at $450 per unit.  They say it is 100% occupied.  Asking price is $254,000.  It was originally listed over a year and half ago for $350,000.   Also they are offering owner financing.

It sounds too good to be true.  Any advice.  Should I go check it out.  Am I missing something huge?  Any advice would be very much welcomed.  Again I apologize if I have forgotten something.

Interior Features

  • Wall/window air cond.
  • Carpet
  • Tile flrs
  • Range and oven
  • Refrigerator

Exterior Features

  • Elect. srvc avail.
  • Public water supply
  • Public sewer srvc

Heating Features

  • Gas
  • Electric

Unit Features

  • 12 total unit(s)

Misc

  • Topography: Public sewer srv
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Jean BolgerPro Member
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
12y

It depends on the condition of the place really. My guess is that there's a ton of deferred maintenance. That doesn't mean it's not a good deal, you'd just need to know more specifically what you're getting into. I bought some 1-bd apartments for even less a door, but pretty much all of the cash flow will be going towards rehab and repair for quite some time. Once that is done it should be a really good money maker though.

At $450 rent (again, same as mine) you're dealing with a pretty management intensive tenant base. Make sure you use something like 13-15% for management when you run your figures. 

Do the tenants pay utilities, water?

In the lower rent price point it's possible to get a cheap price only to find that the expenses eat so much of the income that there's not enough meat on the bone at the end to make it worth the hassle. But if you can get your expenses in line it could be just fine.

Seller financing may mean a tired landlord, or someone who thought they could deal with that tenant base and were wrong. 

Go check it out! I'll be curious to hear more. Is it in Tyler? I played a concert there for the Community Concert Series folks a few years ago.

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  • Jonathan G.Pro Member
    OP
    Investor · Tyler, TX · Member since 2014 · 96 posts · 22 votes
    12y

    Correct me if I am wrong but I feel like a fair asking price would be between $410,000 - $450,000.  Am I figuring that right?  I mean I am happy to not pay that much if it is a legit deal.  

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    12y

    This sounds like a great deal.  Do your due diligence.  Normally offers on commercial deals are done with a due diligence period.  If the deal isn't all it seems you can then walk.  

    There is a lot that goes into commercial due diligence. search for threads here. There has been plenty written about it. 

    My wild guess is the reason it hasn't sold is the property needs a lot of work.

    2Reply
  • Jonathan G.Pro Member
    OP
    Investor · Tyler, TX · Member since 2014 · 96 posts · 22 votes
    12y

    Thank you Ned.  Are you familiar with the book ABC's of Real Estate Investing by Ken McElroy?  The reason I ask is because he talks all about proper ways to investigate commercial deals.  Was wondering if that would be a good source.  

    I will definitely check out the other forums in regards to this subject.  

    Another question for you.. would this be crazy for me to get involved in something this big for my first Real Estate investment.  Just wondering your thoughts.  Thanks again!

    0Reply
  • Jean BolgerPro Member
    Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
    12y

    It depends on the condition of the place really. My guess is that there's a ton of deferred maintenance. That doesn't mean it's not a good deal, you'd just need to know more specifically what you're getting into. I bought some 1-bd apartments for even less a door, but pretty much all of the cash flow will be going towards rehab and repair for quite some time. Once that is done it should be a really good money maker though.

    At $450 rent (again, same as mine) you're dealing with a pretty management intensive tenant base. Make sure you use something like 13-15% for management when you run your figures. 

    Do the tenants pay utilities, water?

    In the lower rent price point it's possible to get a cheap price only to find that the expenses eat so much of the income that there's not enough meat on the bone at the end to make it worth the hassle. But if you can get your expenses in line it could be just fine.

    Seller financing may mean a tired landlord, or someone who thought they could deal with that tenant base and were wrong. 

    Go check it out! I'll be curious to hear more. Is it in Tyler? I played a concert there for the Community Concert Series folks a few years ago.

    4Reply
  • Jean BolgerPro Member
    Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
    12y

    Ken McElroy's book is good. Also check out Frank Gallinelli's "Insider Secrets to Financing Your Real Estate Investments" (it's not just financing, one of the best overall reads on getting into commercial investment)

    2Reply
  • Jonathan G.Pro Member
    OP
    Investor · Tyler, TX · Member since 2014 · 96 posts · 22 votes
    12y

    Jean, thank you so much for your comments.  I really appreciate you chiming in.  This would be my first Real Estate deal, so I am not sure if I am biting off more then I can chew?  I am very motivated and am great at handling high stress.  I would definitely use a property management company without a doubt.  I just don't know if this is the best way to get my feet in the door with Investing.  However I am willing to take a huge learning curve if the right investment came a long.  

    If I had a property management and I did my due diligence, what type of an adventure would I be signing up for?  I see that you recently purchased a 29 unit complex in Columbus, OH.  You obviously have some great experience and exposure to this type of deal.  Who knows maybe we can partner ;-).  I am open to any more feedback.

    0Reply
  • Andy Argonaut
    Real Estate Investor · San Francisco, CA · Member since 2013 · 47 posts · 11 votes
    12y

    12% cap rate using a 50% expense ratio. Not bad, but any big repairs or lots of problematic tenants could drastically drop that. 

    What are the terms of the seller financing being offered? And do you know why they dropped the price so much? 

    You definitely want to determine the condition of the property, repairs needed, the length of the leases. And why are they selling?

    1Reply
  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y

    Get a real estate agent to do your due diligence, which be better than some Guru book.


    Joe Gore

    1Reply
  • Jonathan G.Pro Member
    OP
    Investor · Tyler, TX · Member since 2014 · 96 posts · 22 votes
    12y

    Andy,  all great questions.  None I seem to have the answer to yet.  I just saw the post tonight as I was property searching online.  I wanted to bounce it off everyone on BP before I started to get too deep into it.  I have put a request for the listing agent to get back to me.  Any particular questions you think I should have answer please fire away.  Again all feedback is welcomed.  Thanks!

    0Reply
  • Jonathan G.Pro Member
    OP
    Investor · Tyler, TX · Member since 2014 · 96 posts · 22 votes
    12y

    Joe, how would I go about qualifying a good agent to do the due diligence for me.  What should I be looking for?  Any advice?

    0Reply
  • Jonathan G.Pro Member
    OP
    Investor · Tyler, TX · Member since 2014 · 96 posts · 22 votes
    12y

    Also can anyone tell me how to get the @ sign to work... thanks

    0Reply
  • Ed L.
    Residential Real Estate Agent · Hattiesburg, MS · Member since 2011 · 475 posts · 141 votes
    12y

    The numbers work great.  Now it's time to do due diligence and make sure it's legit.

    How are the surrounding properties? Other Multi family, SFR, Commercial, etc.. I've ran across some great 4 unit multi family properties for as little as $35,000.00. Seeing them in person revealed they were in a large project style complex that I was uncomfortable investing in.. Basically you were forced into being a slumlord because all the surrounding properties were owned by slumlords...

    Are all the units currently occupied and current on Rent?  

    Are the units sub metered for water, sewer, and power?

    How does the roof look?  Any signs of foundation issues?  When was it built?

    Are there any issues with property lines?  I've bought one house that included the neighbors living room, bought another that my master suite was on the vacant lot next door, and just contracted another where the house appears to be on the neighboring lot all together...  I'm a big believer in GET A SURVEY...

    My biggest concern would be the surrounding properties and the neighborhood in general.  At that price you can catch up on some deferred maintenance if the building is structurally sound.  If needed I might would go in and renovate the units during tenant turnover.

    Sounds like a great deal, my next move would be to tie it up and get started on my due diligence.  

    3Reply
  • Kyle Oxford
    Fort Worth, TX · Member since 2014 · 11 posts · 2 votes
    12y
    Hey Jonathan Gregori I had some trouble with the @ sign too when I joined. Just type the @ and then without a space type the first couple letters of someone's name and wait a second for some names to load, then simply click the name you want the is in the suggestion box that appears. I'm not sure if that makes sense in writing, but I hope that helps! Also, I don't know a lot about multiple units, but it looks exciting. Congratulations on chasing your first deal.
    1Reply
  • Jean BolgerPro Member
    Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
    12y

    Great advice from @Ed L. 

    to make the @ work: Type @? 

    A list will appear at the bottom of the page with the names of folks who have posted to the thread- you can click on a name.

    Or, type the @ and then start typing the name of the person . This allows you to "summon" someone that you are colleagues with even if they have yet to comment on that thread.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    12y

    The market is telling you it won't even pay 4 times the gross rent! I can't imagine how horrible the area/property must be. Is this in a foreign country? Now if a 4 GRM is typical I wouldn't want to invest in that area.

    1Reply
  • Michael Jones
    San Antonio, TX · Member since 2014 · 29 posts · 14 votes
    12y

    @Jonathan G. An easy way to determine some of what you are up against besides all the good advice you have received is to look at the age of the building or buildings. If it's over 20 years you probably need a new roof. Ask the age of all the Mechanical s - HVAC, HWH, Appliances. I have seen a post that an investor in buy and holds will not buy anything older than 10 years. Because in 10 more years you will be doing alot of work to update the units from a maintenance nightmare.

    1Reply
  • Cal C.
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    12y

    @Jonathan G. Have you actually been to the property?  That should tell you a heck of a lot about whether it is a good deal or not.  Obviously, you need to do a lot more due diligence than that, but that should give you and excellent idea if it is a good deal or not.

    Also, since you posted so much information don't be surprised if someone on here and hasn't read your post and is going to look at the property in the next day or two.  

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    12y

    I am not familiar with The McElroy book but have heard it is good. 

    I absolutely would NOT count on an agent for due diligence on a  commercial property. A good CCIM (a commercial agent designation) can help but no agent is going to read leases, do estoppel letters, review their tax return, contact vendors to confirm expenses.  An agent is not qualified to do a commercial inspection.

    Admittedly good commercial agent can help you with suggesting what due diligence you need to do. However you have no way of knowing their experience and qualifications and their suggestions may miss some key items. The average agent wouldn't have a clue what due diligence to do. 

    Some other things you should do:

    1. Survey
    2. Phase 1 environmental inspection
    3. interview current management company
    4. interview potential management companies and ask their suggestions on how they would manage the property.

    Perhaps @Joel Owens  can jump in here

    1Reply
  • Jonathan G.Pro Member
    OP
    Investor · Tyler, TX · Member since 2014 · 96 posts · 22 votes
    12y

    @Ned Carey  @Cal C. @Michael Jones @Jean Bolger @Ed L. 

    Thank you everyone for the input.  If I wanted to go into a partnership with an investor who I know has enough capital to fund the down payment and closing of this or any particular deal, how would I go structuring a fair partnership.  

    If all they wanted to do was bring the money to the table and not have any other responsibility.  I would in turn find the deals and then manage the whole process from beginning to end, from building the right team, to running numbers to making sure every other aspect involved would be taken care of.  

    With that setup how and what would you do to make the deal work as a partnership since in the end I would most likely not be bringing any cash to the table.  Eventually what it would look like is I am finding investors that are sitting on their money either in cd's or low interest rate investments like, micro loans.  Or other's that do not have trust in the stock market and are not 100% sure what to do with their money.  

    If I was to bring the knowledge that I learn over time and a somewhat safe investment which would allow them to not have to give much of their time to, other then understanding the deal but only bring their money to the table.

    Nothing as big as syndication but maybe smaller amounts of capital between $50,000 - $300,000.


    Thank you all for your help and advice.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    Hi Jonathan,

    When you started this topic you made it sound like you were going to purchase this property or put down some funds of your own.

    As the topic has progressed it has changed from partnering with some of your money and others to now putting no money down and having others invest with you.

    I deal with clients in the millions in cash and I do have ones with a few hundred k etc. For someone with 4 million liquid 200k might be small capital but to others that amount is a large portion of what they have so it is very serious either way.

    I didn't see you mention your experience level but from the questions you are asking it would appear ( maybe I am wrong )  that you do not have any. You mentioned people with CD's and bank accounts getting 1%. The type of investment you would be offering is very risky with all 1 beds. The CURRENT occupancy at 100% means nothing. What you want to know is trailing last 24 months occupancy rate and turn levels. The turn levels is different from the occupancy rate. You could have in a years time for example of 20 units total where ten of them have turned over creating a 50% churn rate.

    People with 1% cd can invest in triple net leasing and get 7 percent cap rate and with tax equivalent yield in many cases approach double digit returns and do nothing but collect the check. In your scenario they are depending on your track record and even with property management you have to "manage the manager".

    Maybe you should just run the numbers on this property and if it's a deal then get under contract and assign it to build capital while you get experience. I wouldn't feel comfortable trying to take substantial amounts of capital from people with no experience because you would be learning with their money. Hope it helps.

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    12y

    @Jonathan G.  can you do a syndication with no experience - yes. But you can buy one lottery ticket and win  a million dollars too. It is just not very likely. 

    As mentioned in the last two posts doing a syndication, even a small one with, no experience is not practical. You cannot be honest about the risks, obviously greater than you are aware of, and expect people to invest with you when you have no track record. 

    I do not want to discourage you, I do want you to have realistic expectations. Tread carefully while you are gaining experience. - Ned

    1Reply
  • Andy Argonaut
    Real Estate Investor · San Francisco, CA · Member since 2013 · 47 posts · 11 votes
    12y

    @Ned Carey I agree with you 100%. DO NOT rely on an agent to do your due diligence or help you evaluate the deal. You MUST do it yourself.

    The absolute bare minimum starting point is to (1) look at the leases, (2) get estoppel agreements signed from tenants and make sure the purchase contract is contingent upon the estoppel agreements being obtained i.e. you can walk away if that doesn't happen, (3) make the contract contingent upon your review of the seller's tax returns. The tax returns often tell the true story of the income and expenses associated with the property. Listing agents often times put in proforma numbers that are completely out of touch with reality. 

    And there are many other items of due diligence that you must do as Ned pointed out. Contacting vendors to verify expenses, ensuring the security deposits from tenants are transferred to you, survey, property condition and disclosures, etc. And make sure any purchase contract you submit has enough contingencies that you can walk away if something doesn't check out. That's the most important part here. Agents don't like that, so there is always some friction. But for commercial transactions it's very normal.

    1Reply
  • George Smith
    Investor · Latham, NY · Member since 2014 · 217 posts · 65 votes
    12y

    My biggest concern would be location with this many one-bedrooms. Is this market located in an area that can support it? Are their colleges, hospitals, etc where singles live? I would be sure to get the last 2 years of tax returns/ bank deposits prior to making an offer. If they can't provide it I'd probably walk IF I didn't know that market very well. 

    Also, I know an investor who 2 years ago bought an 8 plex of single units near a local smaller college. What he didn't do was to check to see if the college had any plans to build additional student housing. Well, they did and last year they added on-campus student housing that has affected his vacancy rate greatly. 

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  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    12y

    A couple notes:

    1) It's previous list price isn't helpful unless it sold. Otherwise it just tells you that $350,000 was too much and nothing else.

    2) It may be fully occupied, but that doesn't mean it's in good shape or that it has good tenants. Check the rent roll and make sure it's economic occupancy is good and there aren't a lot of people behind. If you get it under contract, ask for bank statements or some sort of proof of deposit to verify the rent roll. And take a good look at the quality of the units, the tenants and how they keep their place. Talk to them. If the unit is trash and the tenants appear problematic, there's a good chance you will be evicting them shortly.

    I don't mean to scare you off, it very well may be a good deal. But be sure to check those details carefully.

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  • Tom Keith
    Investor · Longview, TX · Member since 2012 · 631 posts · 186 votes
    12y

    @Jonathan G. welcome to BP Jonathan. It seems as if you have changed your request for knowledge to looking for lenders or partners with $$. Not sure if you have decided or learned that the deal is above your level or just questions scared you. That is not bad either way.  I looked at your profile and you show experience and hands on dealing with contractors, lenders, etc from current occupation. Is there anyone you can trust to lead you from that team?  I have contacts in Lngview that might help with inspections, due diligence etc. but running the numbers and selling to lender is going to be yours and a partner if it works.  Good Luck. Tom

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