How to make this 10 unit multi deal work
Hey everyone, thanks in advance for reading. I'll start by saying that I am fairly new to understanding the terms and concepts, so I'm eager for feedback. Here goes.
The property is listed at 350,000 and is a 10 unit split between 2 buildings, an older and newer. Mix of 1 BD/1 BA and 2 BD 1 BA. There are some clear cosmetics that need to be fixed (untamed landscaping, falling down chain link fence) but I actually am going to ignore renovation costs for this post and focus on the income/cash flow analysis.
Rumor is the seller is pre-foreclosure (I couldn't find an LP in the county records though). I checked county records and he purchased for 600k in 2007 but refinanced for 300k in 2011.
The seller, for our analysis, has submitted a rent roll and 12-month cash flow. Their listed "market price" for their units averages 525.5. Their PRI based off their rent roll is 63,060/yr, so 10% vacancy yields:
GOI = 56,754/yr
From their expense sheet, they show maintenance expenses 20,185/yr, management costs of 5,392/yr. A quick insurance quote yields 12,665/yr and they paid 4100 in taxes last year (appraised value 300k).
Total Operating Expense = 42,243/yr
NOI = $14,510 year.
Which is low. That's before debt service, which on a 100% financed 350k loan at 5% is 22,540 year. Worth noting is that their ACTUAL GOI is closer to 43260 due to actual vacancy and less than market rents. So not only would they be underwater with their full EFI, they aren't even meeting it. The max loan for a DSCR of 1.25 is only 180k. Again, neglecting renovations.
So I decided to look, what would make this deal work? I noticed a ton of late fees on each month, perhaps indicating poor quality tenants. Also, management costs are high in my opinion, with a fair amount of vacancy. So maybe the management company is probably blame and is putting low quality tenants in place, not being strict about rent dues, and perhaps rents are worth of an increase to from 525 average to 600. Eliminate management fees and do the work myself (I live < 1 mile away), and all of a sudden we are looking at an NOI of 27,950. Max loan with DSCR is then 347,000, and I'm sure there are other maintence fees that could be eliminated, such as 1800/yr when there isn't any landscaping to be seen and there are mountains of overgrowth from a nearby property and some splits in the asphalt. Fix = me with a weedwacker and a bottle of weed-killer. Its Florida, so it'll blend in with the rest of the sandy lots no problem.
From here, I suppose I can go determine if these changes are feasible. I'll go talk to a few tenants, figure out the management situation and do a rent survey. The place is in pretty good shape, but looks like complete crap from the outside due to peeling paint and weeds poking through concrete. So I calculate renovation costs and take then off of my offer price, which will be much less than 350k. I talk to the seller, figure out his situation, and what kind of costs he has and if he's open to creative solutions.
I have some challenges though. I only have about 15k to put toward a down payment. The seller is also delinquent on taxes from last year, so there is 4k owed and who knows how many mortgage back payments. Running his numbers, he's clearly in the hole and may have been there for a while. Covering these costs plus renovations might be feasible for the right price, but how do I go about getting the financing for that? Hard money with a refiance? Renovation loan? I'm worried that if I don't create enough equity with the renovation that I won't be able to refinance.
Looking forward to anything you guys have, thanks!
Chris