My First Deal Analysis - Round Two

Real Estate Deal Analysis & Advice
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My First Deal Analysis - Round Two

Trevis Kelley
Rental Property Investor · Buffalo, MO · Member since 2014 · 51 posts · 9 votes

Since my first property I was seriously looking at fell through, I thought I would try this again.  Hopefully it is a winner this time.

@Bram Spiero 

 I just wanted to let you know that I am evaluating another deal again to give you a chance to jump in.

It is really too bad that I cannot attach files to the post.  I guess I need more training on how to actually use BP.  I have been so focused on everything else, that I haven't worked on that.

Here's the info, though:

$320,000 asking price, although my highest and best offer would be $302,000.  This property has 10 1br 1ba units.  It brings in $4400/mo in rent and laundry, making the rent $425/unit.  This could be upped to $495/unit and still be below market rent, which would make the income potential to be $5100/mo.  I am basing my numbers on the lower rent number as I am not able to see the place until Friday.

I must also say that my father has dabbled in investing in this area, and either owns or has owned (and rented) about 10 properties in the area.  He is the one giving me these numbers, although I am concerned they are a little low.  This could just be analysis paralysis kicking in as well.  So, I am here presenting his numbers to see what you guys think and go from there.  The rent numbers above I completely agree with, as the higher of the two numbers is still lower than what I was originally thinking they should rent at (based on my initial analysis so far from comps at $550/mo and beyond).

The initial mortgage would be for $240,000 @ 4.25% 20 years for a monthly payment of $1486.  We would ask the seller to carry back $52,000 @ 5% 10 years for a monthly payment of $552.

Mortgage 1: $1486

Mortgage 2: $552

Taxes:  $333

Insurance: $250

Repairs: $400

Pest Control: $20

Water: $100

Electric: $350

Trash: $100

Replacement: $200

Vacancy: $220

This gives him a total of $3911 for all expenses (including mortgages) leaving $489 available for cashflow.  He thinks a great deal and I should pursue it.  I am not as sure.  A couple of things I think he is leaving out:

Management: $440/mo.  This is something that I will not necessarily need at first, but I will want it at some point (possibly before I get Mortgage 2 paid off).  This would pretty much leave me with no cashflow once I add this in.

Other Capital Expenditures: $300 per month on top of what he has for replacement (which I think may be low anyway - he tends to only want to replace stuff when it breaks, but I want to be able to rent my place, so remodels need to happen every once in a while).

As it stands now, I don't think I would be cashflowing for 10 years, and even then, it would be just a bit.  Maybe he knows something I don't.  It's hard to have a good conversation with him about it, as he is in Afghanistan and we are communicating by e-mail.  Every time I send him something saying that I think his numbers are low or that I think he is missing things, he just writes back telling me to use this spreadsheet he made to go to the bank and see what they will give me on a loan.  So, I don't know exactly what he is thinking.

That's why I am on here with this awesome BP community.  Is my dad right?  Is this a good deal from your eyes (clearly, I don't expect you to know the market).

One more important detail. This property is being sold FSBO by an investor who has been doing it for 40 years. He told me over the phone that he is liquidating to be able to retire. He doesn't want to be tied down to the property, so the idea of seller financing does not make him happy. He would rather someone come to the table with the down payment. I told him that if he would work with me, he might be able to get away from the property faster, and give him cashflow in retirement that would require no work on his part. He doesn't know that my dad has already done some investing in properties (and could back me up financially if needed). That's another dilemma for me. I don't want my dad backing me up financially. I would love to do this on my own, but my dad being a somewhat successful investor could play in my favor with earning this guy's trust. That and showing him that I have at least had a good education and just need some experience under my belt to make it work.

I will update on Friday as to what my conversation with the seller was, but I would like to get some feedback before Friday so that I have a good general idea of how good a deal this is.  If it's something I should be interested in at current rental rates, then I will be more willing to work with the guy.  If not, then it may not be worth pursuing.  If rates were really at $5100 now, then this would be something I would be much more comfortable with as my cashflow before Mortgage 2 is paid off would be about $450.  Right now if you include my concerns, cashflow would be about -$250 for 10 years.

So, what do you think?  Should I pursue this or move on?  Are my dad's estimates good, or do I need to rework them?  Any and all advice is appreciated.

Thank you!

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Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
11y

@Trevis Kelley 

I hate to say it but I see a lot of holes in your Dad's advice. In my opinion, it doesn't make sense to buy something with no cash flow and count on appreciation, especially in the Midwest. All data shows the real estate recovery is cooling off and will continue to do so in 2015. Where is he appreciation going to come from? The Midwest is a cash flow market and if you're not getting cash flow from the start it's not a good deal. $1800/yr is crazy for insurance. but that's Kansas for you. Kansas has some of the highest insurance rates in the nation. Pay attention to insurance. It can kill your cash flow in some markets but it's an afterthought to a lot of people. Why not invest across the border in Kansas City MO? MO insurance premiums are much lower than Kansas and MO is a much more landlord friendly state. I'm just not seeing anything here that would make me want to do this deal, especially when you can do much better going across the state line.

Mike

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  • Trevis Kelley
    OP
    Rental Property Investor · Buffalo, MO · Member since 2014 · 51 posts · 9 votes
    11y

    I forgot to mention that unlike my first deal, this one is in a small town that is thriving and growing at a rapid pace.  It has both college students and military, both of which would be great for this property - as I understand the property right now.  Also, there are some high-tech and science jobs coming into town from a Federal project that has almost completed being built in town.  So, a lot of job growth, business, college students, military, etc.  I have a ton of exit strategies with this property, so I have no concerns from that at this moment.  Just figured I would throw that in there, as that could make a difference on accepting this deal as well.

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y

    @Trevis Kelley 

    Go to mortgage-investments.com and under resources go to downloads and download the free 10 year investment analysis.  Start filling in different scenarios and see the different returns on your assumptions.  It forces you to make business decisions for the future.  Your dad should be able to help you wiyh rent increases and appreciation.

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  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
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    @Trevis Kelley 

    This is a lousy deal.

    Right now you can get $4400/month in rent.

    You've come across $3911 in expenses.  You are adding $740 in expenses to that number bringing your total expenses to $4651.  You are going to lose money on this deal for a long, long time.

    If all 10 units could rent for $550 each, this is a much better investment.  You have a huge range ($425-550) for possible rents.  I'd make sure you narrow this number down to a $25 or $30 range.  That will make your analysis much tighter.  If this place was bringing in $5700 in income I'd buy it with your numbers.

    I don't recommend getting into a Buy and Hold investment unless you are going to make money from the get-go.  With your down payment you can probably find a 4 family property that makes a great deal more sense.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
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    @Trevis Kelley 

    @Aaron Montague got directly to the chase.  The deal is bad.

    The operating expenses you list above are 40% of gross revenue (4400 * .90{vacancy allowance}); however I too suspect they are low (no grounds care / snow removal, plus maintenance is a little low). If you were to assume they are accurate, you are left with an NOI of ~2400.00.

    However, at the price of the cash-flow would have you carrying monthly debt just over ~$2000, leaving your with $400 to address any reserves (i.e. CAPEx) or deficiencies in the operating numbers.  .  

    To do a proper analysis, you would need 2-3 years of financials (& tax statements) from the vendor. You will also need to analyse GRM and CAP rates for other similar properties in the area which have sold recently {If your Father owns similar properties, you should be able to get some insight into the typical operating costs} to see what price is being paid for cash-flows.

    The exercise will be educational for you, but in the end, the current ask price is too great for the cash-flow you would be securing.  Another thing to keep in-mind is that 1-bdrm apartments tend to have higher turn-over than 2-bdrm/3-bdrm, so your make ready costs will be higher then if the building was primarily 2-bdrm units.

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  • Trevis Kelley
    OP
    Rental Property Investor · Buffalo, MO · Member since 2014 · 51 posts · 9 votes
    11y

    @Account Closed @Aaron Montague @Roy N. 

    That's what I was sensing as well.  The deal is probably not going to work unless I can get a lower price, raise rents, or both.  I sent my dad a link to this post so he can see what I am looking at (hopefully).  Maybe he will have other advice after reading this.  I am hoping I can get some insight into what he is thinking about.  I think he is trying to buy for equity (appreciation and pay-down).  I am worried about cashflow because that is what is going to pay the bills.  I consider anything else to be icing on the cake.

    Thank you!   I will continue to try to balance the everything, and make decisions based on numbers, not emotions.  I would love to see this deal work, but it probably won't as it stands now - I will know more about it after tomorrow.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
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    @Trevis Kelley 

    It is fine to determine how much upward room you have in the rents - it allows you to force appreciation of the asset - but, be certain to only pay the vendor for what rents are now, not what they could be.

    Not knowing the area (and what CAPs are for comparable cash-flows) and without getting the actual financials - just going on the information you provided above - I would suspect the deal is overpriced by {at least} 70 - 80K.

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  • Trevis Kelley
    OP
    Rental Property Investor · Buffalo, MO · Member since 2014 · 51 posts · 9 votes
    11y

    @Aaron Montague @Roy N. @Account Closed 

    My dad said this would probably be the best deal I would get in my area. The town I am buying in is growing rapidly (Manhattan, KS), so the market here is tight. Couple that with the fact that we have a growing university in town (Kansas State) with not enough apartments and a healthy military community, it is an area where CAP rates are low. He didn't have the exact numbers.

    He also said that a good reason to buy it is that it may not cashflow right away, however, the equity buildup would allow further purchases and can be done quicker than if I would do it on my own.  He is also quite confident that once I have Mortgage 2 paid, I will see some cashflow.  He states this will be done in 4 years, but I have not had a chance to question where he gets that figure from.  Everything else he has given me says 10 years.  I will let you know what he says about that.

    Sent requests for insurance quotes and waiting to hear back.  Seller stated insurance is $1800/yr (he didn't have exact figure on the phone, but when I met with him, this is what he gave me).  I am also guessing that maintenance will be lower than originally thought, as the seller did a lot to maintain the place over 20 years.  Asphalt roof is just under 10 years old, Furnaces (2011), Hot water heater (2012), window A/C units (2012), appliances (2011-2014), electrical and plumbing (about 2000).  Foundation is good (solid concrete with no visible signs of wear or patching), and fire system is from 2003.  Units are kind of weird shaped and not standard on size or shape (rents actually vary from $385 - $500).  Most of the units are $425.  All units are rented (tenants and/or furniture in each), although one unit is being evicted and has until the end of the month to get out.  That unit will need some work done to it which I will probably make the seller deal with (unless other favorable terms can be met).

    Seller was definitely a landlord who managed at least some of his properties himself.  He was very knowledgeable on dealing with tenants (I could tell just from the way they interacted), and was very open about pointing out issues he has had or things that are still wrong with the property.  I am not sure if that was for distraction, to build trust falsely, or those were all the things he knew about.  It definitely came off as, "Here's my property, take it or leave it".  I will definitely still do my due diligence, but I am feeling better about this property than I was before seeing it.

    Seller wants to be able to fish and work in his workshop all day.  That will probably play as an advantage, as I could them sell him on the idea of cashflowing truly passively.  It will only fly if he sees me as trustworthy, but I think he's feeling more ready to deal with me after meeting.  He told me to be in touch, and maybe we can put something together.  That tells me he might be more willing to work with me than originally stated.

    Now the issue is whether or not it is really a good deal.  I am trying to get into something fairly soon before I lose my nerve and never get started.  I am being told it's not by the people here.  I am being told it is by the my dad, who has had experience in this market.  I am definitely not comfortable investing outside of this market (the only one I know with decent potential).  So, do I take a so-so deal so that I can get into the real estate game and use the experience and equity to move on to a better market, or do I skip on this and hope for something better to come along (and risk losing my nerve)?  My current feeling is that I should probably at least work to put the deal together.  That way I can learn a lot about putting a deal together, even if it doesn't turn into a sale.

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  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
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    @Trevis Kelley 

    I hate to say it but I see a lot of holes in your Dad's advice. In my opinion, it doesn't make sense to buy something with no cash flow and count on appreciation, especially in the Midwest. All data shows the real estate recovery is cooling off and will continue to do so in 2015. Where is he appreciation going to come from? The Midwest is a cash flow market and if you're not getting cash flow from the start it's not a good deal. $1800/yr is crazy for insurance. but that's Kansas for you. Kansas has some of the highest insurance rates in the nation. Pay attention to insurance. It can kill your cash flow in some markets but it's an afterthought to a lot of people. Why not invest across the border in Kansas City MO? MO insurance premiums are much lower than Kansas and MO is a much more landlord friendly state. I'm just not seeing anything here that would make me want to do this deal, especially when you can do much better going across the state line.

    Mike

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y

    At $52 800 Annual rents the GRM is only 6.06. That's on the low end. In SF & HAWAII buyers will pay 15-25+ times the annual gross rents. I would be concerned if properties were selling for less than 10 times gross rents. If properties in your area sell for about 6 GRM then it's priced right.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    11y

    @Trevis Kelley 

    You need to get real numbers and do a discounted cash-flow analysis, but I still do not see it as a good deal as it stands. The GRM is low (~6).

    If you were absolutely certain you had sufficient upward room available in the rents (say 15-20%) and you could convince the Vendor to carry an interest only note (2-3yrs) for 50% or more of the purchase price, you could pay a little more .... but I would still want to get the building for <300K.   

    This is also a very risky manoeuvre to attempt for your first property as success depends on you being correct on the amount you can raise the rent and being able to improve performance before you have to refinance.

    I'm not certain why your father appears to be discouraging of cash-flow, but even if you would be purchasing in anticipation of appreciation (which is drifting more towards the speculating end of investing), rule one still remains: Never loose money!   Which means the property needs to cash-flow.

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  • Trevor Ewen
    Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes
    11y

    @Mike D'Arrigo

    The midwest is definitely not an appreciation market. Thanks for being honest and thoughtful about the prospects on that. 

    1Reply
  • Trevis Kelley
    OP
    Rental Property Investor · Buffalo, MO · Member since 2014 · 51 posts · 9 votes
    11y

    @Mike D'Arrigo 

    Real estate in Manhattan is appreciating at big rate.  Everything in that town is growing, and started to really boom in the last two years as they finish up on what's called the NBAF.  That alone is scheduled to bring 10,000 federal jobs to a town that is only 50,000 people and drops in half when the college students are gone.  This town is not like most of the rest of the Midwest - but of course, you are in California, so more local trends are probably less easy to spot.  I am sure you are right about Missouri being more landlord friendly, but that market is still over three hours away from me, and I am completely unfamiliar with it.  Considering I am stepping outside my comfort zone to buy inside a market I know, going to Missouri is just not a move I can make at this point.  I may be ready to do that a couple years down the road.

    @Account Closed 

    The problem I have with my area is finding those comps. Most are 5+ years old. People just don't seem to sell places very often in my market, and I have not seen much in the way of bigger multi-family properties for a while. Most are either 4 or less units, or their large apartment complexes that I am not ready to handle yet. If I had to guess, though, average GRM is probably in that range. To be honest, I am less concerned about what the official price is, and more concerned with making sure the place makes enough money to pay for itself and cashflow once I get the down payment paid off.

    @Roy N. 

    Does it not cashflow after the down payment at $302,000? I am seeing about $500/mo after it's paid off ($950 if I am managing it myself). I also think my initial numbers for maint now are good, and CapEx could probably be about where my dad had it. This is based off of current condition of the property, as I don't see anything huge in the next 5 - 10 years. But, like you said, the operating numbers need to be tight for this to work. I would definitely manage it myself for the first 5 years, but after that, I don't know. I would be socking all of that money away for a rainy day ($440/mo) and would would do the same for at least 5 years. Hopefully I can also have the down payment paid off by that point and be able to pocket some cashflow, while using the equity to move into another deal with more confidence and financial backing (or just creative financing another one). My father isn't necessarily against cashflow, he is just saying that it's really hard to get in this market with little or no money down. I would have to move outside of this market, which would involve variables I really don't understand yet (or at least not to the point where I would be at all confident in). With this deal, I could gain experience, which would make me more confident with this market, and might allow me to explore the idea of investing in another one. I am about at the end of all the education I can handle without some hands-on doing. I am a doer, and don't really understand something until I have done it. I try to educate myself beforehand, but once I reach a limit, I really need to apply it to be able to make it work. Doing that in a market I already understand will reinforce things I have learned and allow me to work on how to understand a different market from the outside.

    All in all, I do hear what you guys are saying.  You want me to have protection from the unknown and my inexperience probably makes this even more risky.  So, I do have more thinking to do.  I will also say that my dad is backing up what he is saying with his pocketbook.  He will help me foot the bill if something does somehow go wrong.  Talking to the banks will give me a clearer picture of what they think of the deal.  If they are turning it away, then I know that it's probably time to jump ship.  If they all say it would work, then I may have something for my area.  I know that's not the only litmus test, but it is one of them.  Another would be whether or not the seller is willing to help me with financing.  I know that is as much about me as it is the property, but if the deal is good for my cashflow and would allow me to make payments, then why wouldn't I?  I understand inexperience can turn even the best of deals rotten, but that is why I have spent hundreds of hours educating myself (and still am).  Again, he doesn't know this for sure, but after talking to me, I think he senses that I at least know something.

    Again, thanks for the insight.  I have more to talk to my dad about, and more to think about.  I will continue to listen, process, and try to make the best decision possible.  It may end up with me walking away, but at least I will have grown from the experience and knowledge I have gained from everyone.  Thank you!

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  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    11y

    @Trevis Kelley 

    I still have to disagree with accepting no cash flow and counting on appreciation. Markets change and you can't count on appreciation. It's not just that MO is more landlord friendly. Those insurance rates will kill you. Kansas has the 5th highest insurance premiums in the nation. Investing 3 hours away should not be a big factor. You're fortunate to only be 3 hours from a good cash flow market. In my opinion, it's more important to invest in a market that makes financial sense. Those are just my thoughts though.

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  • Trevis Kelley
    OP
    Rental Property Investor · Buffalo, MO · Member since 2014 · 51 posts · 9 votes
    11y

    @Mike D'Arrigo 

    I would tend to agree with you there, but I know nothing of KCMO.  I don't know the good neighborhoods from the bad, I don't know which market is happening where inside the city, I don't know who my tenants would be, I don't know any agents, maintenance, or property management people there, etc.  Bottom line is, I don't know the city, and can't commute there everyday to find out (I also don't know how to find out from outside it).  I also don't really know anyone there who I could talk to about it, either.  Being that I am still trying to learn the business, that is just too many variables I would have to 1.  Figure out how to learn the answers to those questions from afar, and 2.  Then do those things so I have the people in place.  Then I would have to find the deal, come in to look at it personally, and then come back later to close.  I would then have to come in and see the place every once in a while just to make sure the PM is doing his/her job.  I guess at this stage, I am just too controlling of the details and wouldn't be comfortable just taking someone else's word for it.

    I think that's what the hands-on would give me.  You are right that I am lucky to be that close to a good cashflow city.  It's just not close enough to my comfort zone yet.  Like I said above, even if this deal falls through, I will reinforce some of the things I have learned and probably even learn some new ones on the way.  Maybe then I would feel better about trying to work out the details of a new city.  I don't know.  I will have to see.

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  • JT Spangler
    Buy and Hold Investor · Nashville, TN · Member since 2013 · 264 posts · 102 votes
    11y

    In my fully amateur opinion, there are a few things here to consider:

    - you want experience as a landlord/PM

    - you want to buy in your area, since you know it and are local

    - you're not getting advice from your father as much as you're getting instruction

    I'm with you on points 1 and 2. Getting experience as a landlord and buying where you know the area are both things I think are smart to do. I'm not sure that this is the place I'd start: a 10 unit apartment building where the margins are tight and you're cashflow negative. My concern would be that there's a run of bad luck (an eviction, a domestic disturbance with a restraining order, and vandalism from teenagers all in the same month), and you don't have the cash reserves to deal with it because you're putting money into the property every month.

    I'm a bit concerned about your dad, though, because it doesn't sound like he's listening to and answering your objections. More like he's just talking over you and telling you what to do. If he wants this place so bad, let him buy it. But this is your life, and your financial future -- don't do the deal unless YOU are satisfied that it's exactly what you're looking for.

    Now, one part of this deal that I think is being overlooked is that ANY cashflow is pretty awesome, since you're putting this together with no cash of your own in it. If you're able to raise rents up to close to market level (and market rent for a place like this is DEFINITELY information you'll need to lock down a lot closer than you currently have it, because it's crucial info to not only the profitability* but also the value of the property), AND you have cash reserves to guard against the run of bad luck, I would consider doing the deal. Keep in mind though that a lot of the experienced multifamily investors around here look for $100/door cashflow as a minimum. That may be unrealistic for your market and the huge PITI costs, but something to consider.

    *experienced MF guys, correct me if I'm wrong, but isn't the value of a property this size calculated not by market comps but instead by gross rents? In other words, if our OP could purchase this place and raise rents over the next 6-12 months, could he either flip the property or refi and force enough equity to pay off the seller carried 2nd? @Aaron Montague @Roy N. 

    1Reply
  • Trevis Kelley
    OP
    Rental Property Investor · Buffalo, MO · Member since 2014 · 51 posts · 9 votes
    11y

    @JT Spangler 

    The reason I am looking at a multi-family IS minimizing risk.  If I have to do one of those things, there is more cash coming in.  Also, there is still enough money to pay the mortgage if one of the units is empty.  That isn't the case with single family and all the things you mentioned applies to those as well (although it would only take one of them to happen to be really problematic in that situation).  Part of the reason it's not cashflowing is that I'm getting in for no money.  After mortgage 2 is paid off, it does cashflow, though not very much.

    My whole market is tight, and I will probably be cashflow negative wherever I go in that market.  So to get into real estate, I have to either go outside my market or accept tight margins.

    Also, I wouldn't be putting money into the place every month to cover expenses, I just wouldn't be putting as much away for those bad luck months (my problem is that CapEx is low, and my dad didn't have anything in there for property management - which I would be doing myself). It could break me if it happens early, but that is where my dad is backing me at. He has reserves that would allow him to put money down if I haven't built the cash reserves to deal with it. He is saying that I will build equity much faster with this property than without, and therefore I should at least look at it. It's not appreciation he's looking at, it's others paying for my equity that interests him. It also interests me, but the cashflow interests me more. I am willing to give up cashflow short term to get the property for no money down.

    There are 10 units in the place, 2 are rented for $500, 6 are $425, and 2 are at $385.  The 2 that are rented for $500 could be rented at $550 and still be below market ($600).  The 6 that are at $425 could be rented at $525 easy ($575), and 1 of the 2 $385 apartments could be $525 as well.  The other one would be marketable at $400 (that would be about right, but it is an economy apartment, which is less desirable in my market.  Rents could be $5175/mo and still be easily rentable.  That being said, I need to buy based on what they currently are, not what I expect them to be.

    The price of the building is based on both. You need to have comps to keep track of what the market is doing, and the gross rents to be sure of profitability. There are 2 ways to do this: by the CAP rate and by GRM. I have found the CAP rate method to be able to be manipulated based on who's interests are at hand (mostly due to what the definition of NOI is and the secrecy of what normal CAP rates are in your market). I have found the GRM method to be somewhat more accurate, but it still involves finding comps to see what the average GRM is and then trying to figure out if the property is a good value based on that. You still have to know what your comps are either way. Someone with more experience can correct me if I am wrong, but this is the way I currently understand it.

    The bank will tell me if the price is way off, I am sure.  I am more concerned about getting cashflow.  I might be able to refi if I raise rents, but I would be looking to tackle that down the line (a year or so).  That may aid in cashflowing quicker, but again, I need to buy based on what is there now.

    I am interested in this place because it is so well maintained. All sorts of things are updated that would allow me to spend less on maintenance and be less concerned about needing CapEx money right away. The margins are tight, but the maintenance that has been done helps ease those a bit. I won't know for sure until I get a good inspector in there, but everything I saw told me that it is a solid property.

    It could be that I am wrong.  And, at that point, I would have to put a little money in each month until I could get the place sold.  I know what the rental rates are, so I could raise those to help bring the value up to interest another investor to buy and pay everything off with the proceeds.  Then I would be able to get out without financial ruin, and have learned from the experience so I can do it better next time.  That is what I see as worst case scenario.

    All of that said, I do need some more time to think about it.  Even though it sounds like I am fully ready to jump at this, I am mostly playing devil's advocate as I am still on the fence about it.  I have learned a lot from you guys, thank you.  I am just trying to see what other con arguments I can get so that I look at it from all perspectives.

    0Reply
  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    11y

    JT:  

    The best way to look at any commercial property is you are buying a business (a series of cash-flows).  Like any business, the value is depended upon the cash-flow produced (quantity and quality).

    You could evaluate a commercial building based on the GRM (gross rent multiplier) and it would tell you the price of the revenue stream. However, what is really of interest is the amount left over after the operating expenses have been paid: the Net Operating Income (NOI). If you have two business, each of which produce a gross revenue stream of 100K/year, one has operating expenses of 45,000/yr and the other of 65,000/yr, which one would you rather own?

    Now, it may be possible that the OP will be able to raise rents over the next 12-18 months, but the amount will be constrained by the market rent rates in the area.  Raise rent too high and you'll have the last units to fill and the first to turnover. You will also get a lower caliber tenant (the last minute looker who did not plan their move in advance).

    For the sake of argument, let's say the OP can raise rents enough to have positive cash-flow-before-taxes twelve months out.  He will put in the effort and money to bring the property into performance.  If you are going to the work, why would you pay the Vendor for it?

    Most people would not run out an pay top dollar for a business that is loosing money every month (.coms aside), so why make an exception if the business happens to be a rental property?

    1Reply
  • JT Spangler
    Buy and Hold Investor · Nashville, TN · Member since 2013 · 264 posts · 102 votes
    11y

    @Roy N.  Thanks for that -- I'm totally with you. :)

    My question was mainly whether I've correctly understood that valuation on apartment complexes is done by GRM instead of comps, the way Fannie/Freddie properties are valued. I thought I remembered from a few of the BP podcasts that people had been able to force equity by a combination of improvements that enabled them to raise rents and better management that meant higher occupancy.

    Now, provided the OP has a good grasp of his market, he's saying he can raise rents WITHOUT exceeding market rates, which I think we can all agree is a good idea.

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    11y
    Originally posted by @JT Spangler:

    *experienced MF guys, correct me if I'm wrong, but isn't the value of a property this size calculated not by market comps but instead by gross rents? In other words, if our OP could purchase this place and raise rents over the next 6-12 months, could he either flip the property or refi and force enough equity to pay off the seller carried 2nd? @Aaron Montague @Roy N. 

    Roy N has more experience with bigger apartment building (5+ units) than I do.  

    Value is a pain in the butt to determine on properties.  As we all know, they are almost all worth more to a seller than a buyer.  And what we'd pay for a property is a combination of calculated and subjective. 

    My minimum numbers are $100/door/month AND 15% Cash on Cash return, so my offer is going to reflect that "maximum" purchase price.   Another investor looking at the same property MAY offer less if their minimum per door per month is $150.  They are almost certainly going to offer less if they want a minimum of 20% Cash on Cash return.  Some deals are just awesome, others need to be negotiated or dropped completely.

    That is one side of the "value" of a property. What and how the lending institution values the property is probably vastly different than my evaluation. I don't know much of anything about the commercial world of valuation, but I can tell you that in the 2-4 unit world, the banks tend to run off the same kind of appraisal that we see on a SFH. It is usually a direct comps run with slight variations for neighborhoods and school districts.

    I'm looking at a place right now with an asking price of 40k. The appraisal from 14 months ago has it at 82k. Great for my equity, but not super easy to tap because the rents are too low for me to borrow a massive amount of extra equity. I'll get some, but I won't crank it up to 75% LTV.

    0Reply
  • Trevis Kelley
    OP
    Rental Property Investor · Buffalo, MO · Member since 2014 · 51 posts · 9 votes
    11y

    @Aaron Montague 

    I think that's how I'm going to look at things, at least from a valuation standpoint. Just figure out what is a good price to pay for cashflow. My problem is that I cannot get $100/door for no money down. My market just won't support it. I can't do the traditional way of acquiring properties as I don't have the resources. So, I am going to end up on the lower end starting out. I am still learning a lot and should learn even more as I talk to the banks. I will also be chatting with insurance agents if I have the time. It would be great to get that diamond in the rough, but I think there are not enough of those to build a business off of. If I was buying for less than 75% LTV, then I could cashflow most anything around here (but maybe still not at $100/door).

    My dad's thinking on this:  Get the property and pay what's shown above for 3 years.  Then, refi and take enough out to pay the down payment.  Then the property cashflows.  In another 3 years I have enough equity to get another property (if I just blow the cashflow instead of saving it).  I can then build like this.  My plan would be to research other markets while owning/managing this place and branch out from there.  I wish I felt comfortable enough to move to another market right away, but I am not.

    I have been continuing to look at what's out there (did some driving for dollars today), but I continue to see nothing that would come close to cashflowing. I know for sure that for SFH, I would have to find something priced WAY below market value to get good cashflow. I am not as sure about how to get a good solid value for MF units.

    Here are some properties from my area just so you know what I am looking at.  I have been checking things out for about 6 months and this is the best stuff I have seen (some of it has sold already).  My dad also said this is one of the best deals he has seen in about seven years of looking.  Take that for what it's worth.

    SFH, 3 bd 2 ba: $189,000

    Current rent at $1450/mo

    50% expenses:  $675/mo   100% Financing:  $1130/mo

    Duplex, 3bd 2 ba each:  $237,000

    Total rent at $2250/mo

    50% expenses:  $1125/mo    100% Financing:  $1418/mo

    Duplex, needs about $35,000 of work (very rough estimate), in dying town:  $24,500

    Total rent would most likely be $900/mo

    50% expenses:  $400/mo  100% financing:  $545/mo (mortgage, down payment, and rehab loan)

    http://kspropertyads.rapmls.com/scripts/mgrqispi.d...

    The list goes on like that. The 100% financing is killing cashflows. I need to build up some money quick to buy at a better LTV for more cashflow. The one I am thinking about buying looks like this:

    10 unit, 1 bd 1 ba each:  $302,000

    Total rent at $4400/mo

    50% expenses:  $2200/mo  100% financing:  $1970/mo

    Can you see how that might look better in this situation?  Remember, the ones above are some of the best I found in the last 6 months (I kept analysis spreadsheets on them).  So, I kind of feel like this is the best I might get.  If I don't jump now, I probably never will.  I know I have only been on BP for a short time, but I have been looking for a while.  There is definitely not much out there.

    Perhaps I should just move to Dallas.  At least I have family there that may be able to help me figure out which properties are good and which are not.

    0Reply
  • JT Spangler
    Buy and Hold Investor · Nashville, TN · Member since 2013 · 264 posts · 102 votes
    11y

    Well, if it comes down to buying a bad deal or marketing to off list sellers to find a better deal/expanding your search to out of town areas, I think the latter two are worth considering. 

    Personally, I'm with you in that a %100 financed deal doesn't need to cashflow quite as much right away. But I also have 0% experience with large multifams, so I don't personally think my opinion is worth a whole lot compared to experienced guys who've been there.

    0Reply
  • Dmitri L.
    Investor · DFW, TX · Member since 2013 · 319 posts · 101 votes
    11y

    FWIW and speaking from exactly zero experience... 

    Just an idea to throw into the mix - one thing that hasn't been mentioned is the amortization schedule of the proposed loans. It's almost 100% financed, with 1/6 paid off over 10 years and the rest of 20.

    Try figuring out in excel (hint - PMT/PPMT/IPMT formulas) how long it will take you to pay down the notes to where you have say 30% equity, so that you can refi at 70% LTV into a single loan - then check what your cash flow would be at that point.. Assuming the property is steady and you have some reserves, it may not be such a bad bet? Especially with some upside potential on the rents.

    Cheers

    -D

    0Reply
  • Trevis Kelley
    OP
    Rental Property Investor · Buffalo, MO · Member since 2014 · 51 posts · 9 votes
    11y

    @Dmitri L. 

    It's 3 years.  That's how long before I could pay off the down payment and cashflow.  In the mean time, though, I have to survive all kinds of potential hazards that could destroy equity, cause major headaches, or even (gulp) bankrupt me.  I also have to worry about errors in my estimates, unseen maintenance problems, and other such issues.  Once I have some significant cash reserves, these things become less scary.  Here is what I am looking at saving, if I never spend a dime on maintenance (which won't happen):

    400/mo in maintenance, 200/mo in CapEx, and $440/mo in PM fees (which I will be doing myself for at least the first 3 years. So, I could be socking away $1040/mo. That gives me $37, 440 over 3 years. That sounds like a lot, but one fire, roof replacement need due to water leak, etc could easily eat that away. And again, that's doing zero repairs during that time, which just won't happen. So, I have to balance how much of a risk this is, and how much I am willing to take for what I am getting.

    0Reply
  • JT Spangler
    Buy and Hold Investor · Nashville, TN · Member since 2013 · 264 posts · 102 votes
    11y

    Another option, since you're going to self manage and are on tight margins, is to learn to do a lot of the simple repairs yourself. Most people with internet access, common sense, and some mechanical competency can tackle the minor repairs you might expect to run into. Builds a valuable skill for you, and keeps your maintenance costs down (on paper -- in real life you need to assign a value to your time).

    0Reply
  • Trevis Kelley
    OP
    Rental Property Investor · Buffalo, MO · Member since 2014 · 51 posts · 9 votes
    11y

    @JT Spangler 

    That is one thing I am thinking about.  The property already has a live-in maintenance guy and they provide services at a good discount, so there is that as well.  I used to work as a hotel maintenance person, so I am familiar with doing smaller repairs.  Some I cannot do even though I have the knowledge due to disability.  However, some I can still do and have done on my own house and my parent's rentals.

    If it makes sense for me to do the repair, then I will.  If not, I have a maintenance guy on-site, which I don't really know how good he is until I start working with him.  I saw some repairs during the tour that I thought maybe he might have done.  If they were done by him, they seemed to be done well.  Again, this is mostly speculation at this point, and won't be confirmed until I have worked with the guy for a while.

    0Reply
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