10 plex analysis

7 Replies

Hello everyone,

We're looking at a deal and would love some input from some veterans. This is a 10 plex in our town, just five minutes from our house. We would do the property management ourselves at least initially, but of course I'm factoring in those numbers because the goal would be to turn it over to a property manager some day. Here are the numbers:

Asking Price $495,000

(they had it listed at 399 about a year and a half ago)

Year Built: 1995

(10) 2/1 units, 1100 sq ft townhouse style with laundry in attached shed, very poor design on laundry in unheated space)

$6175 Gross monthly rent (9 [email protected], 1 @ 550)

$74100 Gross Annual

$6272 Taxes

$1900 Insurance

$7410 Property Manager (figuring 10%)

$950 Garbage

$4968 Water/Sewer

$7410 Maintenance and repairs (figuring 10%)

$1200 Snow/Lawn

$7410 Vacancy (figuring 10%)

$37520 Total Annual Expenses

$36,580 Net Operating Income

Thinking we could get it around $425,000 so 8.6% cap rate

I know I need to factor in the loan/closing costs, I'm in the initial phases of finding out what that would be. Any input is much appreciated, thank you in advance

So your numbers look reasonable but I didn't see a CAPEX reserve? Snow/Lawn might be a bit lean in my experience... it's a minimum of $35 a week for grass and snow can get pricey quickly especially if they have parking lots and sidewalks. Taxes are reasonable (I try to keep them below 1 months rent)... water/sewer/trash is expensive (similar to what I pay which is high at about 1 months rent)... property management is likely high but once you add in leasing costs it probably works out in that range.

So lets analyze. This is 10 units so it will be commercial. I'm calculating based on a 5 year balloon with a 30 year amortization at 6.5%. Given a 25% down payment (and assuming you roll closing costs into your offer), you're looking at $106,250 down and a mortgage of $318,750. Given the assumptions above, that would be a mortgage of $2,014.72. That would leave Cash Flow at $12,403.36 for the year... an 11.7% CoC return.

That's a little lean by my standards.

I would check in to the price increase. This is a commercial property... there are only two reasons the price can jump. Either a change in market CAP Rates in the area... or higher NOI. If they didn't just rehab all the units to greatly increase rent rates... or if the market didn't suddenly change making commercial properties a lot more desired... I would go back towards previous numbers. At $400k you'd be at a 13.8% CoC which is more in line with my 15% minimum.

Things to watch here... lack of a CAPEX budget (given not low taxes... and not low water... and not low vacancy... the 50% rule may not work for you here)... and in a commercial property, you won't lock a rate for more than 5 years. Chances are rates will rise... a 1% increase in interest is going to cost you $2,400 of cash flow a year... that's almost 20% of your cash flow in just 1 interest point.

I agree with Nathan's comments.  I like to make 3 percentages above my cost of money.  If the cost is actually then I would want 9.5%.

Good Luck.

Bill

Thank you for the response! I think we need to get a better price to make this work. So what's the 50% capex rule? I'm trying to understand more about capex and the difference for maintenance and repair. 

Just talked to the commercial lender. I am shocked the said a commercial appraisal is $3000-$3500! Way more than I expected. 

Still hoping to make this deal work, I'll update with any changes.

Hi Jocelyn,

A couple of ideas, first there are a couple of excellent property management companies in CdA at 8 % and you may be able to lower it even farther since all properties are in the same location. ASK

Second if the water meters are separate even though they must be in your name you can back charge each tenant for the water they use.  Simply include the amount used in the next months rental payment.

The management company charges each of my units for water sewer and garbage in CdA.  It also cuts down on water usage.  When I was paying for water in homes with washers and dryers tenants were inviting their friends and family over to wash clothes.  When they started paying the cost themselves the amount of water usage dropped dramatically.

Originally posted by @Jocelyn Hinz:

Thank you for the response! I think we need to get a better price to make this work. So what's the 50% capex rule? I'm trying to understand more about capex and the difference for maintenance and repair. 

Just talked to the commercial lender. I am shocked the said a commercial appraisal is $3000-$3500! Way more than I expected. 

Still hoping to make this deal work, I'll update with any changes.

The 50% "rule" says, long term, you can expect 50% of your ideal (market rate) gross operating income to go to expenses.  It is an average across large apartment complexes across the country and many use it as a starting point, a sniff test, for how solid a deal is.

CAPEX is Capital Expenditures, your major repairs... things like the roof, HAV, hot water heater, appliances, etc. All have life expectancies and generally a 5 - 10% "repair" budget takes care of day to day stuff (rent readies, etc) but not those larger once every few years type repairs. I believe 10% is a typical set aside for those expenses but your mileage may vary.

Are those the current tax numbers? With a new purchase taxes can increase substantially.

Thank you Martin, that's a great idea with the water. I'm not sure if they are individually metered but I will find out. 

Thanks for the explanation Nathan, I really appreciate it. 

Chris those are the current tax numbers, and you're right we need to budget for them to go up.

Thank you everyone!