First time home buyer - Multi-Family deal analysis help

18 Replies

Hello All,

I am looking to buy my first real estate property and decided to start with the multi-family house. I have found one 4 unit house and looking for your help with deal analysis, below are the details of the property.

1) House located in Stratford, CT, built in 1860 so very old house needs total renovation.

Price:$279,900

Units: 4 (all are 2 bed 1 baths)

DOM:162

Total SqFt +/-:5,406 +/-

$/SqFt:$51.78

Zoning:RS-4

Acres:0.35 Acres +/-

Age:154 years (1860)

Lot Desc:LEVEL

Attic:Yes

Exterior:Stone, StuccoRoofASPHLT

Heat:Gas, HT/WTR

Cooling:None

Basement:Crawl Space, Full, Partial

Water/Sewer:City Water, Sewer, Sewer Fees

Garage/Parking:OFF/ST

Waterfront:No

REO:No

When I looked at the property there seems to be water in the basement at some point, so i am thinking it might be in flood zone (I have to confirm with agent yet). As I said it needs complete renovation. Any suggestions on whether or notit is worth to take this project given the price and house condition. Also appreciate any advice on what would be a good starting offer for this..

Thanks,

Seshu.

Rents?  Cost of renovation?  Pretty tough to do any deal analysis without that info.

Also need the taxes in Connecticut, East Coast is pretty notorious for high taxes.  Also find out about the flooding as it may affect your insurance rates.  What kind of loan do you have lined up... 20% down, 5% down?  What sort of interest rate?

We're investors... we don't care as much about things like cost per square feet and exterior as we do about the expenses of maintaining it and the income it generates.  You could make arguments that certain exterior and interior finishes may have less (or more) long term maintenance costs but most of us don't get into that much detail honestly.

It seems like that would be a tough one to start out with, given the amount of work it needs. It can be tough juggling contractors, electricians, roofers, etc. without have a VERY clear idea what something may ot may not cost. However, it may be a useful learning experience. Keep us updated!

You need to think about two parts:

1.  How much will you have to spend to get the property operating normally (one time or capital expenditures)  Usually helps to have a knowledgeable contractor see the place if you know there is work to be done.   Your cost basis will be what you pay to purchase and what you pay to rehab. 

2. What will be the annual Net Operating Income of the property once you have it back in shape? You could google NOI or start here:

 http://realestate.about.com/od/knowthemath/ht/net_...

#2 / #1 is you capitalization rate.   That will help you determine if it is a good deal, how much you can hope to finance etc..   If you knew you were going to go through all of the hassle of renovating and landlording for a 3% or 5% or 10% or 20% return, your willingness to do it should vary with the cap rate.

As for bidding, start low - find out what you can from the listing agent about other offers, best of luck.   

Sorry I didn't provide the rent/tax/finance details to start with..

Tax: $ 8300 

Insurance: 3630 (i got a quote from geico)

Rents: 4200 per month (1100 + 1100 + 1000 +1000 )

I am getting a 20 % down mortgage @4.125 interest rate.

I am not sure how much it would cost for renovation, I am planning to have few GCs look at it this weekend for estimates. But I am thinking it would be at least $100,000 . 

Thanks,

Seshu. 

Originally posted by @Jon Holdman :

Rents?  Cost of renovation?  Pretty tough to do any deal analysis without that info.

 Thanks Jon, updated the info.

Assuming $100K in rehab it looks like an OK deal to me.  Not great, but OK.  Details below.  But if truly needs  a full gut rehab are you really going to be able to get a conventional loan?  Conventional lenders often have requirements on property condition.

purchase: $279,900.00

rehab $100,000

units 4

price/unit $94,975.00

down percentage: 20%

down payment: $55,980.00

loan: $223,920.00

rate: 4.125%

term: 30

payment: $1,085.23

total rent: $4,200.00

rent/unit $1,050.00

rent % 1.11%

With self management

exp, cap, vac% 36%

exp, cap, vac: $1,512.00

NOI $2,688.00

cash flow: $1,602.77

cash flow, annual: $19,233.27

cash on cash return: 12.3%

With property management

exp% 50%

exp $2,100

NOI $2,100.00

cash flow $1,014.77

cash flow, annual $12,177.27

cash on cash return: 7.81%

Adding your $100k renovation estimate into the equation, you're looking at $379900 plus closing costs. Given that, your rents barely break the 1% rent to purchase price threshold. If that's normal for your area, then it might not be too bad. 

Considering a renovation that size would take 3 months at least, it'd be that long before you're able to start cash flowing (CF). That old of a property, it'd also be good to make sure there aren't any historic implications to your rehab. If the local historical society has any say/leverage on construction requirements, it could certainly eat into any potential CF/profit.

Other than that, my rudimentary numbers indicate a potential 8.69% cap rate and a 6.93% cash on cash return (CCR); assuming 10% property management & maintenance allowances. All that said, I think your decision comes down to answering three questions:

1. Are those kinds of numbers appealing to you? CCR is too low for my taste.

2. Are you willing and able to dive that deeply into rehabbing your first purchase?

3. Are you able to carry the costs while under construction?

This is my perspective as a fellow newbie investor and I hope it helps.

@Jon Holdman  

He's at 25% expense just with insurance with taxes... add in any utilities (water/sewer/trash), vacancy, repairs, CAPEX... I get that you use 36% as a standard number but it wouldn't seem to hold true on this property unless I'm missing something?

Granted, with a $100k rehab, repairs and CAPEX ought to be low in the near term...

@Nathan Emmert  you're correct.  I'm just using my standard numbers.  The taxes do seem very high.  In this case the standard numbers may be too optimistic.  Maybe those taxes could be appealed to get them to a more reasonable number.

Thank you all for the responses..it seems like tough one to decide..based on the analysis 100K rehab seems to upper limit and if estimates from contractors match this and if there is no flood insurance then looks like I can go with this one..again thank you all for your responses and will keep you posted with updates.

Originally posted by @Jon Holdman :

@Nathan Emmert  you're correct.  I'm just using my standard numbers.  The taxes do seem very high.  In this case the standard numbers may be too optimistic.  Maybe those taxes could be appealed to get them to a more reasonable number.

Stratford, CT taxes are notoriously high even in the already high Connecticut area. I'm not saying it can't be appealed, but personally I wouldn't bank on it. 

Thanks Jonathan, do you have any recommendations for good area/city to invest near by ? Do you think Bridgeport, CT is a better for investment than Startford ?  

Hi @Seshu Yaramala  

Would you be funding the rehab out of pocket, or building it into your financing through a 203k type program? In my experience most banks are going to have an issue financing a property if it is uninhabitable, vacant or needs a lot of work unless it is through a renovation loan product. If you already have financing lined up for this, I would love to know who you are working with...

In any case, I think the numbers on the property are pretty tight. This property definitely won't work if you were planning to live there and have the other three units carry the load as is discussed in a lot of "house hacking" scenarios in the forums and podcasts. 

I hope this helps, good luck!

Dan

Originally posted by @Daniel Raposo :

Hi @Seshu Yaramala 

Would you be funding the rehab out of pocket, or building it into your financing through a 203k type program? In my experience most banks are going to have an issue financing a property if it is uninhabitable, vacant or needs a lot of work unless it is through a renovation loan product. If you already have financing lined up for this, I would love to know who you are working with...

In any case, I think the numbers on the property are pretty tight. This property definitely won't work if you were planning to live there and have the other three units carry the load as is discussed in a lot of "house hacking" scenarios in the forums and podcasts. 

I hope this helps, good luck!

Dan

 I am working with William Raves, they qualified me and started showing me the houses, this is one of the house they showed me. I am assuming they are okay with rehab costs since they showed the house, but nonetheless I will cross check if it is going to be an issue. Do you know if it is possible to find  1% 2% deals in this area ? I am looking in all the areas from Stamford to New Heaven, so far this house is the one with best numbers..appreciate your thoughts.

Bad news is that they probably only qualified you for the purchase price, definitely check with them for how they qualified you and for what type of loan. 

I don't really subscribe to the 1 or 2% rule because they tend not to work as well in higher price ranges (like our area) I mainly look at Income vs. Expenses and make sure I am conservative on both fronts, with enough for vacancy, capex, a healthy maintenance budget, etc. 

I have decided not to purchase the property after some further analysis.

1) I have had couple of GC's look at the property and both estimates are in the range of 130K for just inside renovation, which is well above my initial estimate.

2) The property is in Historic District, so looks like we cannot do anything outside of the property.

3) One of the contractor pointed out some of the structural issues and strongly suggested to not purchase the property :)

4) Daniel is right about the loan, mortgage manager confirmed that it requires a separate renovation loan.

Thank you all for inputs with this deal analysis, it helped me a lot in my decision making.

Happy Holidays..

Thanks,

Seshu.

If you have that much cash on hand, you might look at your investment and life goals to see whether it's critical that you begin investing in CT (a state with insanely high taxes and home values). 

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