My first deal...need help figuring out how to analyze...Need feedback

28 Replies

Ok BP friends...I've spent quite some time analyzing this deal. I still have some due diligence to do like go out and take a contractor on the property to see if it needs any fixing up. First question to that...should I be doing that before or after I lock up the deal?? 

Ok, let me get into the analysis of it...this is a 6 Unit Multifamily Building. There are 5- 1 bedrooms and 1 studio apartment. The rents are as followed: $680,$500, $650, $675, $675, $650. Which totals $3,830/month rental and $45,960/year

EXPENSES a year

taxes:             4,189

garbage:            182

sewer/h2o      1,200

electric/heat 10,000

ins                  1,002

mgmt             4,596

=                  21,169 a year

Gross income:        45,960

                           -   21,169

                           =  24,790 a year

He's asking 119,000 for the place however he's really motivated to sell. He said, "You'd be surprised what I would take for it." He said he's willing to consider any and all offers. Which I'm guessing I have some negotiating power here. It needs a roof and siding and the chimney fixed on the outside (~$12,000). I haven't been inside to check it out yet. That's next. He says it's sound though. He's not willing to do a seller financing on it. I think he just wants the cash to buy some other investments near him. He also said he knows a lender that will figure it repair costs in which his money will sit into escrow until the repairs are done on the place. Repairs will be fixed with his money right after closing. I just have to get an estimate from a contractor and his money stays in escrow until it's fixed. 

The reason why he's selling is he had a trusted property management company taking care of this place but the owner died in the summer and now 3 of the 6 units are vacant and he knew them personally so he knew his place was being taken care of. Now it's not up to his standards and he's in NYC and said he could sell this place and get two in the city and oversee them himself.  

There is a mentally unstable lady in one of them which he said she can go if I wanted. She's been there 10 years and someone pays her rent for her He also said her apartment is atrocious. (Yay). She does have her own entrance so she doesn't bother anyone. So that would leave it down to 2 rented and 5 vacant when purchased if I wanted her gone. 

All of the units are on one electric and one heating. I don't think I can or would switch the heating over. However, I'm wondering if I can for the electric. 

I have a couple options for financing here:

I could get a loan and have a partner put a down payment.

I could offer cash in which we figured we have (with the partner) $37,000 (which is really low I know, but hey you never know!)

or I could do the lender that does the fixing of the property but I haven't figured out how to run the numbers on that one yet.

All I know is I will be offering lower, I'm just not sure yet. 

Ideas on this place? Anything I'm missing? Please let me know! Thanks! 

Anyone want to help me on this?? PLEASE??!

@Nichole Wall  

With just a few back of the envelope scratches - not a full discounted cash-flow analysis, a few things pop out:

1) Vacancy allowance (vacancy is presently 50%) - what is the average vacancy for the area?  If you do not know, use 10% ... but in your case, I'd use higher since the building is half empty at purchase.

2) maintenance allowance / CAPEx set aside - allow at least 10% for this as a minimum.  In your case if the roof it due, have it quoted and give the Vendor the option of replacing it or crediting the costs of the purchase price.

3) PM ... 10% is typical ... yours seems slightly high ... but you may have calculated it from scheduled rent rather than actual revenue.  With 50% of the units vacant, the PM fees should be far lower.

4) Snow and lawn care.  I know it snows in NY and you likely have grass growing once the snow is gone ... better budget for it.  I put 1500/yr in my calculations.

5) Your utilities seem high for a six unit.  I see you have bundled electricity and heat.  Does the building have a common boiler?  Is it fired with NG, oil or electricity?  Are the units individually metered?  Is the Vendor carrying utilities for any of the units?

Assuming you have the building full at your scheduled rent w/ a 10% vacancy allowance; using your expenses with the following changes: 10% maintenance; 10% PM; 1500/yr for landscaping and snow, I get annual operating expenses of ~26,500, leaving you an NOI of just under $15K.

I made the assumption that you would finance at 75% LTV @5.5% w/ a 30yr amortization. I also assumed your opportunity costs to be ~8% {always like to set my assumptions on the high side}.

I also added $15K to as renovations to be performed at time of purchase ... to cover the roof and any other bits.  I also did my calculations at the ask price of 119K.

With all the above, the property should yield an ROI between 11 & 12% and a CoC between 18 & 19% with good a strong debt coverage ratio (2.4) and a Break Even Ratio of 71%.

The biggest negative I see is the operating expenses are pushing 64% of gross revenue ... most of this is your $10,000 utilities bill.  If you can have a plan to improve upon those costs - putting utilities in the hands of tenants; replacing the existing heating system with a newer more efficient solution or making improvement to the building envelope (windows, insulation, etc) and pull them down below 60%, you have a good long term cash cow here.

Now:  If I were modelling this building for purchase, I would take a much more dire set of assumptions (20% vacancy, 15% maintenance & CAPEx, 10% PM) and assume I need to spend 30K right out of the gate to fix things.  I would also assume that expenses would grow by 1.5%/year, that appreciation would be negative (depreciation) .. say -1% and that there would be no improvement in rents.   

Just for fun, I did this. The building would still survive in this fictitious dire world ... but would not be the best use of your capital if the opportunity cost is 8% -; The ROI would be only 4%, the CoC 5.5%, but your debt coverage would still be 1.55 (good) and the Break even ration 72%. Your operating expense ratio would be 74%, but you would still be able to make debt service requirements (for the first couple of years).

Updated almost 4 years ago

... it may be costly (30-50K?), but just do the math to determine the length of payback. If you are moving each unit to its own electrical, you could entertain pulling the central heat and putting electric heat in the tenants hands. {Note: I do not like

Updated almost 4 years ago

As to item 5) in my response. I noticed afterward that you had indicate there is common heat and electricity. This sounds like it may be a converted SFR (old Victorian/Georgian/Edwardian?). I would get quotes to have it rewired ... it may be costly (3

Updated almost 4 years ago

{Note: I do not like to do this unless I have made the building reasonably energy efficient)

While I'm not a multi-family rental guy, I have been around the forums for a while so since nobody else has replied as yet, I'll take a stab at it. First of all...yes, I would get the contractor to look at it first. That may make a big difference in your offer amount. The big thing that's jumping out at me right now is I'm not seeing anything set out for vacancies or CapEx. I'd be sure to mark out 5% or so for each of those. I'd also maybe figure maybe $30k to fix up the units right off the bat. Sounds like at least one of them will need it pretty badly. That may also work to force appreciation in the units as you'd be able to raise the rents some. So, if his initial ask is $119k I'd start by taking off the $12k for the roof, etc. and maybe negotiate some of the $30k out of it. What are comps in the area like? Maybe $100k would make it quite a deal. The lender sounds like hard-money. It's typical for a hml to hold funds in escrow then send an inspector out to check the work before they release the funds. They also charge out the wazoo for interest (10%-18% plus 2-6 points). I'd go through conventional financing with the partner providing the down payment...but I tend to be more traditional and conservative with a lot of that.

Like I said, this is outside my realm a bit but I hope something I've said helps and someone more experienced will correct me where I'm wrong.

Good luck! :)

LOL! Looks like @Roy N.   posted just before me! What he said! :)

Roy, thanks for the serious schooling on this deal. Good luck on this purchase Nichol. Keep us posted please. 

Originally posted by @Nichole Wall:

Ok BP friends...I've spent quite some time analyzing this deal. I still have some due diligence to do like go out and take a contractor on the property to see if it needs any fixing up. First question to that...should I be doing that before or after I lock up the deal?? 

Ok, let me get into the analysis of it...this is a 6 Unit Multifamily Building. There are 5- 1 bedrooms and 1 studio apartment. The rents are as followed: $680,$500, $650, $675, $675, $650. Which totals $3,830/month rental and $45,960/year

EXPENSES a year

taxes:             4,189

garbage:            182

Nicole - is garbage really only 15 dollars a month for 6 units or less than 3 dollars a unit per month?  

@William P.  

It does look a little suspicious doesn't it.   I looked at a 16-unit earlier this year where garbage was $80/month.  Turned out the owner's son hauled the garbage and recycling himself each week.

@Nichole Wall  

William has opened the door for axiom #2 when analysing a property:  Assume the Vendors is lying to you and her/his numbers are bogus.  You will need to do a little digging to find out what garbage service for a six unit is per-month in that area.  We pay $55/month for garbage at our six.

Originally posted by @Roy N.:

@William P. 

It does look a little suspicious doesn't it.   I looked at a 16-unit earlier this year where garbage was $80/month.  Turned out the owner's son hauled the garbage and recycling himself each week.

@Nichole Wall 

William has opened the door for axiom #2 when analysing a property:  Assume the Vendors is lying to you and her/his numbers are bogus.  You will need to do a little digging to find out what garbage service for a six unit is per-month in that area.  We pay $55/month for garbage at our six.

@Roy N  -  I pay 89 a month for my garbage at my house (total ripoff).  15 a month for a 6 unit building is hard to believe

Wow, thanks for all the great feedback!! Let me fill you in on a couple things...

1. Vacancy rate...I don't know what it is in this area and actually I'm not sure how I would find that out. Any suggestions?? And say I use a 20% vacancy rate...how do I calculate that?? I guess I don't understand how to add that in. Sorry. 

2. I totally forgot to add in snow and lawn care. I guess I didn't think of that and maybe assumed the PM was to take care of that! Oops. I'll find out what that is but $1,500 sounds accurate. 

3. The garbage is an actual quote I received from the city. They estimated it for me on the 6 unit. I should double check that then if everyone thinks it's low. Thank you!! 

I'm scheduling to go see the units this week too with a contractor. I'll have a better idea for repairs. 

As far as comps in the area, as far as I've seen, they range from 84,000-200,000 so it's hard to say, I ran one set with the wrong square footage number. I need to do it again on top of fixing these numbers. When I get that number, I guess I could base my purchase price on the repairs needed (including meter conversion). I'm really thinking I'm going to offer a really low price if I even want to get into this deal because of the repairs needed on the outside along with the meter issue. 



Originally posted by @Wendell De Guzman:

Nichole, put the property under contract BEFORE you inspect it (provided you have an inspection contingency on your contract). 

Use my Cashflow Analyzer simple spreadsheet and take a screenshot of it just like below. Here's the link to the Fileplace:

http://www.biggerpockets.com/files/user/Mister4clo...

 Wendy- I'm dealing with a property off the mls, would I still put the property under contract before inspecting?? I think I could do that then put it under contract with my set price. That was what I was thinking. 

Originally posted by @Nichole Wall:

Wow, thanks for all the great feedback!! Let me fill you in on a couple things...

1. Vacancy rate...I don't know what it is in this area and actually I'm not sure how I would find that out. Any suggestions?? And say I use a 20% vacancy rate...how do I calculate that?? I guess I don't understand how to add that in. Sorry. 

You allocate a vacancy allowance as a deduction from your scheduled rent. viz:

Scheduled rent:             3830/mth                45960/yr

vacancy (20%):              766/mth                   9192/yr

Gross revenue:             2614                         36,768

2. I totally forgot to add in snow and lawn care. I guess I didn't think of that and maybe assumed the PM was to take care of that! Oops. I'll find out what that is but $1,500 sounds accurate. 

3. The garbage is an actual quote I received from the city. They estimated it for me on the 6 unit. I should double check that then if everyone thinks it's low. Thank you!! 

If that is the quote from the City, then go with it.

I'm scheduling to go see the units this week too with a contractor. I'll have a better idea for repairs. 

As far as comps in the area, as far as I've seen, they range from 84,000-200,000 so it's hard to say, I ran one set with the wrong square footage number. I need to do it again on top of fixing these numbers. When I get that number, I guess I could base my purchase price on the repairs needed (including meter conversion). I'm really thinking I'm going to offer a really low price if I even want to get into this deal because of the repairs needed on the outside along with the meter issue. 

Comps are not really applicable to commercial property, they are typically valued based upon the strength of their cash flow.  That said, I have encountered small commercial multi-family buildings (5-7 unit) being sold by residential realtors where they have tried to use comps.

As far as repairs.  Get a contractor or two to walk the property with you and give a quote ... you might need to pay them $50.00 - $100.00 (should be credited towards any work you eventual get them to do).  Once you have that, you can determine if it is really a big job, or just seems like it on the surface.

The purpose of this walk through with the contractor is to formulate your offer.  You will still have your building inspection and inspection condition in the offer itself.  Then you can hire a building inspector to crawl the building ($800 - $1200) ... I would not skimp on this step, especially when new to investing.  We still use a building inspector - and, at times, engineers - during diligence; it has saved us many times over the cost of hiring them.

Wendy- Also, I can't figure out how to put a screen shot on here. I did it but it won't go in the reply. I have question on a couple things for this...

1. operating expenses...is that automatically calculated?? Or what percentage do I put in there for it?  

2. net operating income automatically calculated along with the less annual debt service and CCR?? I'm confused on that bottom part.

Also I've been trying to learn about cap rate but don't have a total grasp on it. How do I find out my cap rate? 

Sorry I'm so new to this! Thanks for all the help so far. ~Nichole

Originally posted by @Roy N.:
Originally posted by @Nichole Wall:

Wow, thanks for all the great feedback!! Let me fill you in on a couple things...

1. Vacancy rate...I don't know what it is in this area and actually I'm not sure how I would find that out. Any suggestions?? And say I use a 20% vacancy rate...how do I calculate that?? I guess I don't understand how to add that in. Sorry. 

You allocate a vacancy allowance as a deduction from your scheduled rent. viz:

Scheduled rent:             3830/mth                45960/yr

vacancy (20%):              766/mth                   9192/yr

Gross revenue:             2614                         36,768

2. I totally forgot to add in snow and lawn care. I guess I didn't think of that and maybe assumed the PM was to take care of that! Oops. I'll find out what that is but $1,500 sounds accurate. 

3. The garbage is an actual quote I received from the city. They estimated it for me on the 6 unit. I should double check that then if everyone thinks it's low. Thank you!! 

If that is the quote from the City, then go with it.

I'm scheduling to go see the units this week too with a contractor. I'll have a better idea for repairs. 

As far as comps in the area, as far as I've seen, they range from 84,000-200,000 so it's hard to say, I ran one set with the wrong square footage number. I need to do it again on top of fixing these numbers. When I get that number, I guess I could base my purchase price on the repairs needed (including meter conversion). I'm really thinking I'm going to offer a really low price if I even want to get into this deal because of the repairs needed on the outside along with the meter issue. 

Comps are not really applicable to commercial property, they are typically valued based upon the strength of their cash flow.  That said, I have encountered small commercial multi-family buildings (5-7 unit) being sold by residential realtors where they have tried to use comps.

As far as repairs.  Get a contractor or two to walk the property with you and give a quote ... you might need to pay them $50.00 - $100.00 (should be credited towards any work you eventual get them to do).  Once you have that, you can determine if it is really a big job, or just seems like it on the surface.

The purpose of this walk through with the contractor is to formulate your offer.  You will still have your building inspection and inspection condition in the offer itself.  Then you can hire a building inspector to crawl the building ($800 - $1200) ... I would not skimp on this step, especially when new to investing.  We still use a building inspector - and, at times, engineers - during diligence; it has saved us many times over the cost of hiring them.

 Yes that's what I intend to do with the contractor! Glad I'm on the right track with that. :) Thank you. 

That makes sense with the vac. rate, duh. :)  Thank you. 

@Nichole Wall  

You're going to give Wendall a complex if you keep calling him Wendy ... though the rest of us find it charming ... it may just stick ... What do you think Wendy (Account Closed )?

The CAP rate is simply a ratio: (Net Operating Income (NOI) / Acquisition Cost) If the property produces an NOI of 15K and has a purchase price of 119K + 8K in diligence and closing costs you would have a CAP rate of 11.8%.

Now, be warned that CAP is one of the most abused ratios in real estate ... you will see pro formas from Vendors claiming amazing CAP rates, but neglecting to show how the arrived at the number (i.e. which expenses were omitted, whether vacancy was considered, etc). Furthermore CAP is local, so comparing CAP rates of properties in different places is not real meaningful.

Essentially CAP will let you know the cost of the cash flow produced by a property in relation to the cost of similar cash flows produced by other properties in the same location {provided the CAP for each property was calculated using the same methodology}. Another important caveat is that CAP does not tell you anything about the quality of the cash flow. You may have two buildings with a CAP of 9%: one is 10 years old with modern conveniences; the other 65 years old and nearing functional obsolescence. {this is an extreme, likely unrealistic example, but serves solely to prove a point}.

HAHA! Soooo sorry WENDELL!!! My apologies!!! 

Ohhh yes, that's what it is! I was figuring that out the other day. Ok, got it. Thank you!

Originally posted by @Nichole Wall:

Wendy- Also, I can't figure out how to put a screen shot on here. I did it but it won't go in the reply. I have question on a couple things for this...

1. operating expenses...is that automatically calculated?? Or what percentage do I put in there for it?  

2. net operating income automatically calculated along with the less annual debt service and CCR?? I'm confused on that bottom part.

Also I've been trying to learn about cap rate but don't have a total grasp on it. How do I find out my cap rate? 

Sorry I'm so new to this! Thanks for all the help so far. ~Nichole

 Nichole it's Wendell. I am a guy. Wendy is my lady cousin. :-)

Anyway to answer your questions, the operating expenses & net operating income are all automatically calculated together with CCR (which stands for cash-on-cash return). Here are some basic equations:

Gross Rent + Other Income = Gross Scheduled Income

Gross Scheduled Income less Operating expenses (do NOT include the mortgage payment) = Net operating income

Net operating Income less Mortgage Payment = Cashflow

Cashflow divided by Money Invested = CCR (cash on cash return)

Cap rate = Net operating Income divided by (Property price + repairs)

Cap rate is simply your cash-on-cash return had you paid ALL CASH (i.e., no mortgage) for the property. It's a measure of risk/reward. Better areas and newer properties have lower risk and therefore lower cap rate. War zones and buildings that are 100+ years old have very high risk and you can find them at double digit cap rates.

Originally posted by @Roy N.:

@Nichole Wall  

You're going to give Wendall a complex if you keep calling him Wendy ... though the rest of us find it charming ... it may just stick ... What do you think Wendy (@Wendell De Guzman )?

The CAP rate is simply a ratio: (Net Operating Income (NOI) / Acquisition Cost) If the property produces an NOI of 15K and has a purchase price of 119K + 8K in diligence and closing costs you would have a CAP rate of 11.8%.

Now, be warned that CAP is one of the most abused ratios in real estate ... you will see pro formas from Vendors claiming amazing CAP rates, but neglecting to show how the arrived at the number (i.e. which expenses were omitted, whether vacancy was considered, etc). Furthermore CAP is local, so comparing CAP rates of properties in different places is not real meaningful.

Essentially CAP will let you know the cost of the cash flow produced by a property in relation to the cost of similar cash flows produced by other properties in the same location {provided the CAP for each property was calculated using the same methodology}. Another important caveat is that CAP does not tell you anything about the quality of the cash flow. You may have two buildings with a CAP of 9%: one is 10 years old with modern conveniences; the other 65 years old and nearing functional obsolescence. {this is an extreme, likely unrealistic example, but serves solely to prove a point}.

 Thanks for the mention Roy (I think - LOL).

I agree with your assessment of cap rate. And it's not only the most abused ratio in real estate, it's also the least understood. I have people who say that cap rates only apply to multi-family apartments. Not true. Whatever property or investment or a business that produces income will, by definition, has a capitalization rate.

So if I don't use comps on a multi-unit for this and the value is based on the cash flow, then how do I determine how much it's actually worth then? 

You have to know the cap rates of similar buildings in the same area as your building. It's like doing "comps" but with cap rates. However, for starters, most cap rates would range from 8-12% averaging around 10%. So use 10% cap for now and see where that ends up.

Ahh I see, thank you. Also, my calculations from the analysis you had me use showed only a CCR of 1.53% Is there a minimum that I should look at for that? I wish I could show you the screen shot but it's not letting me share.

Nichole, if your CCR is only 1.53%, it's way too low. You might as well deposit your money in a Certificate of Deposit. :-)

Here's how you can take a screen shot:

https://www.youtube.com/watch?v=EoTpIYLBtKs

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