8 Plex Deal Analysis
Hi guys, I'm still a newbie but interested in a 8 Unit apartment building.
Built in 1990's. All apartments have attached garage as well as washer dryers.
4 one bedrooms which rent for $550
4 two bedrooms which rent for $750
All currently rented with year leases. Few long term tenants.
Owner pays heat and water / sewage. Tenants pay electric.
New roof 2012, new hot water heater in 2013, and boiler overhauled last fall.
Decent condition in older neighborhood but vacancy rates have been about 4-5% in the last 3 years. Seller has provided last 3 years of tax returns.
Problem is the asking price: $725,000!
I ran my calculations with a sale price of $650K. What do you guys think? I would have to obtain a commercial loan 4.5% fixed for 5 years with 25 year term.
Purchase Price $650,000
Down Payment $130,000
Loan Term 25 Years
Interest Rate 4.50%
Principal & Interest Payment $2,890
Closing Costs $5,000
Gross Scheduled Income (GSI) $62,400
Vacancy Rate 8.00%
Number of Units 8
Pro-forma Income Statement & Cash Flow
Gross Scheduled Income (GSI) $62,400
Less Vacancy $4,992
Total Actual Annual Income $57,408
Gross Operating Income (GOI) $57,408
Annual Operating Expenses
Accounting $100
Utilities (gas and water / sewage) $5,000
Landscaping / Snow removal $2,100
Maintenance & Repair $4,000
Property Insurance $2,000
Property Management $0
Real Estate Taxes $6,000
Total Operating Expenses $19,200
Net Operating Income (NOI) $38,208
Annual Debt Service (mortgage payments) $34,684
Before Tax Cash Flows (BTCF) $3,524
Key Operating Ratios
Capitalization Rate 5.88%
Cash on Cash (COC) 2.61%
Gross Rent Mulitplier (GRM) 10.42
Net Income Mulitplier (NIM) 17.01
Debt Coverage Ratio (DCR) 1.10
Expense Ratio (ER) Per Unit 33.44%
Price Per Unit $81,250
Acceptable deal? I like the sound of having 8 units in one building. Less back and forth. Nicely updated but some appliances are old.
I also did not count any capital improvements into the calculations since the roof and heater were recently updated.
Is it worth it? My area is really booming and most investment properties available are 2-3 plexes and built in the 1900's. Very old. Lots of new apartments coming up but I think lots of working class folk will be priced out of those.
I know the cap rate is kind of low but this would be a buy and hold situation. Will also offer some tax advantage since I am a high income earner.
Any thoughts or help would be appreciated!
@Paulina Purnama Hello! Thanks for sharing. Would this be your first RE deal? Or apartment deal for that matter?
I would add what it would cost to hire out property management, because heaven forbid something happens and you need a property manager to take over. I believe if you factor in those numbers you're looking at a yearly loss. Even if we didnt add those numbers, a 5.88% cap rate? You would be better off putting the money in the stock market. You need to factor in what your time is worth, and if you add that in, this deal doesn't look good.
Thanks Jordan!
I know, I know. Cap rate is low but not finding much better in my area. Most are run down houses.
Lots of hassle for barely cash flowing property.
Your right, may not be worth it.
Yes, first RE deal. Maybe I should start with a duplex.
Thanks for the input!
What's the market value of the property?
Hi Bob, hard to determine market value since there are not many 8 plex apartments located in my area. The seller built the property herself with her husband who is a contractor. She is also a real estate agent.
I think we are actually currently in a bubble due to the oil boom. That is why the prices are so high. They are projecting 30K influx of people to the area over the next few years. Many professionals.
They have build a gluttony of newer apartment complexes in the area as well but I believe the older ones will still appeal to some folk.
I did "pad" the numbers a little to account for rainy days but it still isn't looking that great. Maybe the real numbers show a cap of 6% or so. Still isn't good.
My main issue is that I have significant earned income and I need some sort of business to help offset that. I figured real estate would be that business but the tax advantages would not even be that great since I am over the income quota to write off my other income from investments but every bit less going to uncle sam would help.
@Paulina Purnama you need to look around and see if there are better deals. However I will disagree with Jordan on the put it in the stock market. you are right the cash flow stinks, but You are paying down the mortgage nearly $1.000.00 per month When the Mortgage is paid off there will be a nicer cash flow. Most investors do not factor that cost in.
im not usually this black and white when it comes to making a decision like this.... But. No. That isn't anywhere close to a good deal. If nothing makes sense in your area. Find a place where it does. Or invest your money in a asset the performs better.
As a banker having worked on commercial property - small (6 units) and large (550 units), you have to include a few things that the bank appraisal would include. The bank and appraiser would include a management fee that generally ranges from 3%-6% of effective gross income (income after vacancy) depending on your area. Since this a smaller property I would go with the higher end of that range.
The bank and appraiser would also include a capital/replacement reserve in their valuation. Typically ranges between $150-$250/unit. Use the higher side for your buying negotiations. For your financing side, you can make argument to the bank/appraiser for a lower number since a lot of major items (roof, water heater, furnace) have been replaced/overhauled.
You should also easily be able to get a 30 year amortization for a multifamily. Since you are a newbie in commercial real estate, I would suggest that you talk to a few banks early. The closing costs, including appraisals, legal, and bank fees are much higher than residential loans. Also, commercial real estate loans take longer to close than resi loans. Just so you are better prepared and have a few lenders on standby.
Best of luck!
By the way it's not a good price based on your numbers and will certainly get worse with the customary addition of the management fee and reserves. Your debt service coverage will go up with a 30 year anortization but banks typically require minimums of 1.15x or 1.20x for multifamily CRE deals.
Run from this deal. Not enough profit in the deal. There are much better ones if you get comfortable working with teams in other markets. For example I have a deal from my team in Ohio that is 11 units. All in cost - purchase price, renovation $187,000 21% net cash on cash return and since this building is vacant when the renovation is complete and rented 3-5 months the cash flow will support a huge increase in value to where you could refinance out the capital. Love that deal and may have 2 or 3 more buildings like it. Everything is in place to get this done right.
Thanks guys for the advice!
I'm just happy that I feel more comfortable running numbers and can get great tips from guys like you!
I'm gonna bail on this deal. I'll keep looking out for more.
Maybe I'll stick with the stock market!
Thank you for sharing your deal analysis Tutti. Great tips and very helpful. I'm working on deal analysis for multifamily units as well. The market here in the Bay Area is very tight and becoming difficult to find the good deals. I agree, seek an area where the deal works. Good luck on finding your next deal.
throw a low ball offer at them and see what happens. The building isn't worth more than 450/475k to you. They may end up calling you in a few weeks unless they hook someone to over pay
I would not jump into this deal either
Keep looking around