What should I be asking about this Multi?

11 Replies

I'm looking at a Multifamily here in Jacksonville advertised at an 8.3 Cap. This seems to be about a full percentage point higher than other properties that would be comparable. HUD and VA also have tenants in some of these units and the rent is "guaranteed" for those. Apparently this property is pretty good for the lender too b/c they are offering an assumable loan or the opportunity to originate a new one. Renovations were also done w/in the last 10yrs.

So why might this property still be on the market?  

I'm not sure if that question can even be answered at this point. It could be overpriced as compared to comparable properties. The mechanicals may not be as modern and updated as the Seller claims. No rent is guaranteed by the way. Maybe the Seller is understating the actual expenses and not taking into consideration things like reserves, vacancy, debt service...

Maybe there is no off-street parking which limits its rentability. Maybe the neighborhood has a high crime rate. 

The list goes on and on...it's all speculation until you do a walk-through and start analyzing the numbers. 

Good luck. 

@Rob Beland   Thanks for responding, I was curious to see if any red flags showed up in what I knew from looking at it.  I'd be curious to look it over, but I hate to show up and kick tires w/ the listing broker, and not quite be fully committed to buying the place ~yet.  

I agree with @Rob Beland . There could be a number of things going on. I'd suggest doing more research. I've found that the advertised rate isn't always accurate. Comps are key! You might even have to do some door knocking and speak with owners of multi-families in the area. 

-Pete

@Peterson Dierivot

I think I will go check out the area in a bit more detail next week.  Thanks for the input.  

Definitely doesn't hurt to check out.  That advertised cap rate may very well differ from the cap rate that you would operate the property at.  So, be sure to make you own assumptions and assess valuation that way.  

Originally posted by @Carter Melvin :

I'm looking at a Multifamily here in Jacksonville advertised at an 8.3 Cap. This seems to be about a full percentage point higher than other properties that would be comparable. HUD and VA also have tenants in some of these units and the rent is "guaranteed" for those. Apparently this property is pretty good for the lender too b/c they are offering an assumable loan or the opportunity to originate a new one. Renovations were also done w/in the last 10yrs.

So why might this property still be on the market?  

You have the actual financials from whoever is listing the property to review actual expenses? Anything seem fishy? The advertised cap rate reflects how they managed the property which may or may not be your actual cap rate if you were to buy the property.

Does the GRM make sense?

Is the location decent enough to attract renters? (Vacancy rate) 

Are the tenants hell?

Did you get it inspected? 

Is it >4 units?

Definitely agree with asking neighbors, but it could just be a hidden gem.

@Carter Melvin first I would understand the story behind the property. Who is selling and why are they selling? That will likely indicate if there's opportunity or not. Then I would get the basic docs where are: 

- P&L for ideally last 24 - 36 months (income statement, operating statement..I've seen it called multiple things)

- current rent roll 

Once you that info you can project if you should pursue it or not based on if it meets your objectives. All this assumes you know the market. If you don't know the market then I would screech everything to a halt and get to know the market, the submarket and the neighborhood. I'd speak to neighbors, local biz owners, go to the local restaurant for happy hour, and see where the closest McDonald's is and how long ago it was built (helps me identify growth for areas). 

@Carter Melvin , 10 years on a renovation can be a pretty long time for apartments, so make sure you ask exactly what was done 10 years ago what wasn't. Ask for the major cap ex numbers, roof, any plumbing issues, we typically camera the main sewer lines, one break of the line depending the severity and location your talking 20k plus easy. Electrical make sure you don't have aluminum wiring. 

Right now we are looking at a property on a flood plain, this insurance can be pricey, would you be required to carry flood insurance? 

On the financials, make sure that you are getting verified information, rent roll is great, make sure you do a lease audit ( once under contract), request the last two years billing statements. Look at the trailing p & l statements last 36 months - YTD. 

Yesterday we toured a 59 unit deal, broker told us "I don't know age of roof, but with all this rain they didn't have one leak", on a/c "they are all working fine". We luckily found a ladder and climbed the roof mid tour. At some point in the next few 1-3 need roof will need full replacement ( flat roof with alligatoring all over it, patches all over the place and you can start to see the Fiberglass membrane, underneath) Not Good! A/C units about 1/3 were being replaced. We can bet that we will be needing to change the other 2/3 soon also. By looking at financials we were able to see their repairs and maintenance budget was HUGE, why? They are trying to tape and glue the place together and are selling rather than dealing with it, a lot of deferred cap ex stuff. 

If interested send me an email or PM, I'll send you our "due diligence checklist" as well as a one pager of a contract that will show you everything we ask of a seller  

Good luck and we are with you!

Originally posted by @Juan Maldonado:

@Carter Melvin

... By looking at financials we were able to see their repairs and maintenance budget was HUGE, why? They are trying to tape and glue the place together and are selling rather than dealing with it, a lot of deferred cap ex stuff. ..

This is why the trailing historical financials and for as far back as feasibly possible is vital.

I appreciate all the answers, I still have this property on my radar, but I have gotten into negotiating a deal in another location that should close in about a month. Look forward to hearing about an eight unit building in VA.

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