.5% Vacancy Estimate ...Crazy??

Question

A new crowdfunding deal (I will not name so I will not have to deals with lawyers etc., again) is for a fund to buy up 24 multifamily units located in Drexel Hill/Upper Darby, Pennsylvania. 12% preferred, then 60/40 split (60 to investor)

• Internal rate of return in excess of 15%
• Minimum cash-on-cash return of 10%
• 1- to 6-unit multifamily buildings
• 5% loan at 70% LTV, amort over 25years
• Trailing Cap Rate 			8.63%

These are a few of the assumptions that I am I am having a problem with:

1. Economic Occupancy is 99% for the next 5 years. (.5% for bad debt and .5% for vacancy)

2. Rent Growth 2.5% a year

2. Expense growth 1% a year

To anyone that owns or manages small multifamily units, do these assumptions ring true to you?

Long Khang · Answer

@Fred T. @Mark Robertson @Steve Vaughan @James Wise

one of my deal is similar with 5% vacancy, I do neighbor scout to see the vacancy rate with 9%, but he said it high.

I mean it's really hard for newbie like me first time to buy multi apartment building to analyze how do you know it's the real data.

here is one of the deal.

OPERATE INCOME RENTAL UNIT INCOME $363,504

Vacancy 5% $18,175 GROSS OPERATING INCOME $345,329

OPERATING EXPENSES

Advertising $272

Trash Removal $1,320

Management 8% $29,080.32

Supply $16,611 Landscaping/Snow Removal $1,866 Replace/Repairs/Supplies/Maintenance $30,825.14

Water/Sewer $19,214

Utility House Gas/Electric $10,924

Real Estate Taxes $54,100

Insurance $10,061 TOTAL EXPENSES $174,273

NET OPERATING INCOME $171,055

LOAN WITH 20% DOWN $360,000

DEBT SERVICE ($97,524.99)

DSCR $1.75

CASH FLOW $73,531

CASH ON CASH RETURN 20%

Long Khang

Long Khang · Answer

one of my deal is similar with 5% vacancy, I do neighbor scout to see the vacancy rate with 9%, but he said it high.

I mean it's really hard for newbie like me first time to buy multi apartment building to analyze how do you know it's the real data.

here is one of the deal.

OPERATE INCOME RENTAL UNIT INCOME $363,504

Vacancy 5% $18,175 GROSS OPERATING INCOME $345,329

OPERATING EXPENSES

Advertising $272

Trash Removal $1,320

Management 8% $29,080.32

Supply $16,611 Landscaping/Snow Removal $1,866 Replace/Repairs/Supplies/Maintenance  $30,825.14

Water/Sewer $19,214

Utility House Gas/Electric $10,924

Real Estate Taxes $54,100

Insurance $10,061 TOTAL EXPENSES $174,273

NET OPERATING INCOME $171,055

LOAN WITH 20% DOWN $360,000

DEBT SERVICE  ($97,524.99)

DSCR $1.75

CASH FLOW $73,531

CASH ON CASH RETURN 20%

Long Khang

Fred T. · Answer

Confirmed...Whacked!

NEXT..lol

Mark Robertson · Answer

@Fred T.  they did have other categories for expenses, I just combined them to reduce the size of the post..they had these as well...

Salaries & Related (10,050) (10,151) (10,252) (10,355) (10,458)Marketing (660) (667) (673) (680) (687)Repairs & Malntenace (5,935) (5,994) (6,054) (6,115) (6,176)Administrative (3,350) (3,384) (3,417) (3,452) (3,486)Turnover (1,740) (1,757) (1,775) (1,793) (1,811)Management Fees 4.00% (11,588) (11,874) (12,159) (12,452) (12,752)Utilities (15,840) (15,974) (16,110) (16,247) (16,386)

It is not value add....

"Assets acquired are 100% leased at current market rents with significant  opportunity for future rent growth with modest unit upgrades.  Distributions to be made on a quarterly basis to all investors based on  excess cash flow. First year cash on cash returns projected to exceed  10%."

I ruled this investment out, just confirming that their assumptions are Whack!

Fred T. · Answer

Even if the numbers are true, I would evaluate the deal using industry standards to determine if I would invest or advise someone to invest in the deal.

The Local Market Research for this region does not justify those assumptions...red flag 1

Repairs/Mtx/CapEx Account would look closer to $1,594/mth ($19,119/yr) based on the NOI and Trailing CAP Rate noted in the post.

"All Other Expenses" looks extremely high for not having a category and one would have to wonder if those were 1-time expenses or rolling expenses since they deducted from GOI. - red flag 2

Insurance appears to be priced for 12 Duplexes...so if that's the breakdown of the 24 units, then OK.

Vacancy Rates for the PHL-MSA are closer to 4.7%

Growth Rates for the PHL-MSA are forecasted at 3.3%

PA Expense Rates will average between 2-4% thanks to the new Gov

SO...if you use these assumptions, question then becomes is this still a Quality Investment?

Estimated Value: $1,911,935 ($79,664 per unit - red flag 3 for the Upper Darby region)

GOI: $290,000

EGI: $276,370

Taxes: $65,000

Mtx Rsrv Account (incl Life Exp CapEx): $19,119

Insurance: $9,000

"All Other Exp": $43,000

NOI: $140,251 (7.34 Purchase CAP)

Debt Service: $93,888 (1.49 DSCR)

Cash Flow: $46,363 ($160.98/mth/unit)

IRR appears to be off if one assumes the period for computation is 10yrs

10% COC???

Is this a Value Add project and Exit?

I'd be looking to the books on this package...something's off in my opinion./

James Wise · Answer

too low.

Matt Mason · Answer

Mark, I agree the .5% vacancy factor is way too low even for a strong market.  Also, 1% for expense growth?  Not sure how taxes work in PA, but my guess is that they are not capped at 1%.  Other expenses are going to grow at more than 1% too, so I'd say that assumption is way off.

When I see sponsors play games with their pro-formas, I pretty much lose interest right away, because you can't trust much of anything from them.  Either that or they really don't know how to underwrite or evaluate a deal.

Mark Robertson · Answer

Gross yearly income $290K (Rent per unit $940/month)

Real estate taxes $65K

Repairs/Main $6k

Capex $2k

Insurance $9k

All Other exp  $43K

Total exp $125K

NOI $165K

Capex and Repairs seem low to me as well.

Steve Vaughan · Answer

Even without knowing your market, I would say that is way too low.  Collection loss at .5% and vacancy at .5%?  I guess in their world everybody pays, always,  and there is never more than like 2 days between your perfect paying tenants.  I would put those combined numbers closer to 7%, even in a strong market.  What other expenses are being minimalized and what other revenue numbers are 'optimistic' I wonder?  Check the tax returns and all records for sure on this as part of your due diligence.