MF Deal in the Midwest - Gray Area - Is It Worth Pursuing?

3 Replies

There is a 12 unit multi-family that is on the market in a college town near where I live. The units are 1 and 2 bedrooms and priced just about at market. The landlord has moved out of state and this is the last of her properties and she just had a sale fall through, so she may be more apt to negotiate. The numbers are right on the edge for me, so I'm hesitant (2% rule is at 1.44% and the we are under the 50% rule) . Your thoughts would be greatly appreciated.

Here are the numbers:

Purchase Price             $ 325,000 

Rehab                             $ 25,000 

Total Cash Investment  $ 350,000 

Total Monthly Rent            $ 5,025 

Vacancy Factor                      10% 

Laundry                                $ 150 

Total Monthly Income        $ 4,673 

Management (10%)              $ 503 

Maintenance (10%)               $ 503 

Taxes                                     $ 564 

Insurance                               $ 300 

Utilities                                   $ 426 

Total Monthly Expenses     $ 2,296 

Monthly NOI $ 2,377

Annual NOI $ 28,524

I've asked for receipts and bank records to verify expenses and they are forthcoming. The occupied units will take about $5K of rehab once they turn over (there are 2 tenants that have been there for 10+ years). Should I take the plunge?

@Rob McKay   much better formatting here -- I took care of your other post.

@Rob McKay  

Wow ... 12 units are only $5K/month ... are they predominately 1-bdrm?   For a college town the rent seems low.  

The real point of my reply is to advise against including laundry revenue when analysing a property.  It's ben our experience that the revenue from on-site coin-op laundry is pretty close to a wash (pun intended) when you consider the cost of the machines, the water consumption and the electricity/gas required to run them.

In your list of expenses, I do not see groundskeeping (lawn mowing, snow removal, leave raking, etc), nor garbage collection.   

When you back the laundry revenue out of your numbers above, you are left with NOI of 2226.5/mth (26718/yr) which at your acquisition cost of 350K, leaves you with a CAP of 7.6. When you roll in groundskeeping and garbage collection, your NOI will drop and the resultant CAP will be somewhere closer to 7. You will need to do a little research and see if that is above or below market rate in the area.

If you would be paying cash, you need to ensure that 7% is above your opportunity cost. If you are financing, you will need to verify where a CAP of 7 fits into the local market and whether lenders consider it appropriate for the market (if lenders expect properties of that type in your area to be going for a CAP of 8-9, then you'll have to contribute more out of pocket to bring them to the table. You will also need to determine if your CoC meets your opportunity cost.

Thanks, Roy.  There is no greenery on the property, as it is parking lot.  Garbage collection and snow removal are included in the Utilities number.  I hear you on the laundry income.  I think the right answer is to go back to the seller and ask for a reduction in price to make sure the cap rates are in line with the market.  I will do this.  If she were to lower the price to be below $300K, I think it starts to be a more comfortable decision for me.  

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