So, I’d like advice on a deal from the BP family! I’ll share my estimates of the numbers (based on what was provided and my own adjustments) along w/ an update on our negotiations.
Asking price: $249,000
C-class neighborhood. Moderate section 8 tenants spread around, but not crime ridden, many SFHs, etc.
Currently Fully occupied
4 2-bdrm+1bath / 1 3-bdrm+1bath
Rents: $840, $800, $800, $750, $1070 (3bdrm and sole section 8 resident) = $4,260/mo., $51,120 annual
$4,110 Vacancy factor (8%) [about avg for this area]
$250 Laundry Income
$47,260 Net Rent Income
$11,776 RE taxes
$4,726 Prop mgmt.
$500 Snow and Lawn
$2,400 Maintenance and repairs
$26,951 Total Expenses
I offered $201,000 on the property and the seller has indicated $220,000 as his lowest acceptable price. My desire is to achieve a 20% IRR with a healthy conservatism built in (I'm assuming $3K of unidentified deferred maintenance, 4% of monthly gross rent as capex reserve, and 1% annual appreciation). What would you do and why?
On the surface, those numbers look good. As @Brandon Turner mentioned last night on the webinar, you need to run it through the deal analyzer. Good luck.
@Rod Wiggins thanks. I'm just struggling with trying to maybe offer a meet in the middle deal, vs. my desire to acquire this property at $205K max. I agree about the deal analyzer. I think they've built a great product here, but I'm a finance person and excel junkie, so i built my own =)
Also - curious if anyone has closed a deal with an earn out? I see lots of discussions about seller financing, but I think earn-outs may be a good alternative as well. Especially in this case where I may be willing to increase the price if certain conditions are met (say <5% vacancy for next 12 months).
Your analysis looks good, but a few notes:
Without knowing anything about Chicago, the insurance numbers and taxes especially look astronomically high. Have you verified taxes and shopped around for the best insurance?
The utility number looks very low. I would assume water alone would be higher than the number you've given.
The repair numbers also seems very low. This will be somewhat dependant on the condition of the property but I think a number triple to the one you've given would be more accurate over the life of ownership.
All that being said, this could still turn out to be a nice deal. Find out your minimum return number and stick to your offer based on that. If the seller won't budge, move on.
Your NOI should be higher based on my experience of net being about 65% of gross rent. I would not do the deal based on what you presented. There are much better deals out there.
@Masroor Ahmed - I have property here and work with clients to buy properties.
The insurance looks a little low for a 5 unit, I would estimate $4000
The taxes seem really high for that priced building. Did you look up the current assessment on the county website? Once you close you should be able to contest the taxes when the next adjustment period opens
The snow removal is low, if that is a quote you got them I need your guy's number. I pay $1200 a year for unlimited snow/salt on a 25 x 125 lot Lawn care is about $900 for the same lot
Your repair/maintenance looks low. Unless the units are recently rehabbed, you should double it at least
You also forgot Cap Ex
Hey folks, thanks for the responses! Many things to think about. Interesting that there's some conflicting thoughts, but that's the benefit of this group! I think the consensus is that certainly repairs/maint/snow removal is low. I can increase that. As far as taxes and insurance, I'm basically going off his numbers (plus increasing by 3% for inflation since his numbers are a year old). Whats interesting to me, if I make these adjustments, I'm well north of 50% rule - likely greater than 60%. Is that not too conservative?
Am I naive to assume that if he cannot substantiate insurance and taxes with bills, I will reprice my LOI offer price?
I've attached a picture of my model to share some more metrics.
Separately, @Brie Schmidt - loved your podcast. As a point of reference since you're a Chicagoan. The property is in Bellwood...and I'm in Lakeview.
@Masroor Ahmed you can absolutely alter your offer based on actual receipts/bills, make sure that your contract allows for that.
Don't worry about "rules". Every market is different and every property type is different. A lot of the rules you will see here are back of the envelope type calculations for single family. They should not be treated as absolutes just good rules of thumbs as a starting point. I've seen some Multifamily operate with a 50% expense ratio and others at 20%.
As far as the taxes, seems high but go online and you can likely check for yourself. Go to the assessor website.
@Masroor Ahmed - Glad you liked it! The seller should be able to provide you with a YTD P&L and/or his Schedule E so you can verify the numbers. These are usually provided during the due diligence period. I found it online and looked up the PIN - Looks like it just had a reassessment and the value was dropped so those taxes are going to be pretty accurate FYI
|Estimated 2014 Market Value||$226,810|
|Estimated 2013 Market Value||$247,810|
@Masroor Ahmed Do the tenants pay for their own heat, or is the entire building on a single boiler? That's a huge factor in Chicago utilities expenses.
@Masroor Ahmed Very interesting discussion on this MF property. As a local investor I am curious what you did in the end?
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