Analyzing Multifamily in Dallas Texas area

20 Replies

Hello,

I am a frist time invester and I have a opportunity to invest in a 103 unit property in the Dallas Fort Worth Texas area.

I would like to accomplish good cashflow and to leverage the property later to invest into another unit. I would like a little feedback and see what you think about the deal.

Property is a class C

Purchase price = 3,725,000

103 units @ 600 month rent w/ all utils paid

NOI 284,801 @ 5% vacancy

NOI includes Management @ 5%

Debt service 120,000

Expense @ 65%

CAP rate 6.95%

Wow that's a big deal for a first time, good on you, all the best :)...sorry I can't help with the numbers just yet as I'm still getting acquainted with analysing

For C-class properties I would still expect to see a CAP rate closer to 8% in the metro unless this is a pretty solid property i.e. little deferred maintenance, good/great location and decent schools, though buying at 36K/unit is not bad here depending on location.

Are vacancies based on actuals or is that just projected based on vacancy rate for the area?

Have there been major capital expenses recently or are there any planned for the near future i.e. roof, boiler, renovations etc? 

Are there any potential value plays on the property?

Based on a quick review the numbers seem to be decent but would need more info to have a better idea the deal.

Originally posted by @Nathan Lenahan :

For C-class properties I would still expect to see a CAP rate closer to 8% in the metro unless this is a pretty solid property i.e. little deferred maintenance, good/great location and decent schools, though buying at 36K/unit is not bad here depending on location.

Location is in the irving area.  Property is good shape and the current management has started doing upgrades in some of the units, cabinets, laminate flooring upgraded vanities and such.  All units the same size shape and lay out for easier turn.

Are vacancies based on actuals or is that just projected based on vacancy rate for the area? 

Vacancy is based on current actual over last 3 months.  Previously it was 15% and when asked why it was due to bad management stealing rents as the story goes.

Have there been major capital expenses recently or are there any planned for the near future i.e. roof, boiler, renovations etc? 

Roof has been done about 3 years ago replaced and pitched not flat. Boilers are new with in 5 years.

Are there any potential value plays on the property? 

There is room to charge back utilities and charge for parking.  the units are also 50$ less than the closest competitor in the same size unit.

Check on rent concessions which will drive economic occupancy way down. 3 months is way too short for proper vacancy analysis, and you must be wary. It is classic to offer free month's rent etc to increase occupancy and then sell right away before vacancies normalize, so you need to have better numbers and a value-add plan in place and funded before moving on this. Don't pay for your own work, and insist on a longer trailing period for NOI/purchase price calculations. My 2 cents from my own research as another new investor.

 @Seth C.  makes a great point about vacancy concessions - economic vacancy vs. true vacancy rates can be significantly different.  Sometimes they get creative about where they hide this i.e. under agent commissions, marketing, PM fees or within other line items.

For the few units that have been renovated are they seeing a rent premium?  And for what cost/unit?  Is that premium commensurate with competitors or better for the same offering?

Everything I hear from you suggests there is potential in this deal, especially if it has lower than market rental rates.  Irving is a strong market and the deal may very well have merit.  It may not hurt to see where another broker or analyst might value the complex based on some of the data you have provided (not sure what kind of NDA you may have signed)

I know I can sometimes present a deal as more optimistic than it really is to others so make sure you feel comfortable with the story behind the numbers and get enough answers to move forward. 

Good luck with the opportunity!  It is tough to find apartment complexes at decent prices in the metroplex right now. 

Originally posted by @Seth C. :

Check on rent concessions which will drive economic occupancy way down. 3 months is way too short for proper vacancy analysis, and you must be wary. It is classic to offer free month's rent etc to increase occupancy and then sell right away before vacancies normalize, so you need to have better numbers and a value-add plan in place and funded before moving on this. Don't pay for your own work, and insist on a longer trailing period for NOI/purchase price calculations. My 2 cents from my own research as another new investor.

Management is offering a rent concession for first month as the competition in the area. I have 2 years of vacancy analysis but when asked why the vacancy was previously so high - previous manager stealing rents of tenants that were not reported as contracted. Manager is gone and replaced with new management and from my talk seems knowledgeable and has a good amount of experience in property management. All units are under 6 month - 1 year contract.

On funding I have been currently offered a mortgage of 10years fixed amortized over 30 years with Interest Only for first year. The underwriting shows this property at an 8.2% cap which is based on P&L statements. The cap rate I have is based on a management companies quoted budget on the location + 5% management fee. I wanted to know where I would be operating at. 

Value add would include market rent raise of 50$ per unit, charge back of utilities, and charge for parking in line with the closest competitor. If this value add is done by month 13 the bank mentioned a refi and cash out 1/2 of my original investment.

The only cap rate you should be concerned about is the market cap rate.  All the others are smoke and mirrors.  

If you do not have full cap rate information from closed sales you probably will over pay.  There goes any profit.

It is interesting, cap rates move around depending on the market.  A couple of years ago  most lenders would have liked the cap rate in a major metropolitan to be 8.5.  Today, most lenders would like the investment property in a major metropolitan to have a cap rate of 7, unless the property is in California it should be 6.   Also if the property is a premier property, the cap could be lower.  Non major metropolitan, the cap rate should be 8.5.

I hope this information helps.

Nancy,

A couple of things before I start analyzing your numbers. 

Before you even start looking at the asset itself I would want to know what you know about the market, and how you found the deal. Also, If you are an out of town investor how much confidence do you have the management company that will manage the deal? Do you have a long term relationship with them, with actual results?

Depending on what you answer, the actual deal numbers will vary greatly, especially your expense ratio, funds needed to do upgrades (quality of upgrades), and ability to raise rents.

Do you have a solid market analysis of the rents that the comps and reach-to comps are getting (if not you can do this easily using craigslist)? Or are you trusting the management company's information on what they can achieve in terms of raising rents.

After owning and managing over 2,500 apartments the last 10 years it has been very difficult for us to make money on c class deals in c class markets because unit turns, vacancy, concessions and bad debt tend to eat up profits. That is unless you have a management company that eats, sleeps and breaths property management and lives on site. or the property is in a transitioning area that is moving from c to b, or b to a and better paying residents are moving in. 

Im more than willing to help you analyze the deal, but need to know where you are coming from and how realistic it is that your return goals will be met.

Best,

Christian


No company avatar mediumChristian Brodin, TheApartmentInvestor | http://www.theapartmentinvestor.com

@Christian Brodin :

 The deal was found with an agent I have been working with for over a year now. I have spoken with different management companies both large and small in the area and other agents about the market specifics. The information that I collected is that the market in the area is a solid market and had been growing over the years.  

I am an out of town investor from California.  The management company I am working with is one of the largest in the area and has shown a lot of evidence in turning troubled property into solid performers. I have never worked with them before as this is my first deal. There will also be onsite management team with a repair person which is already calculated into the expense.

Apartment turns are priced about 250 per unit for clean paint and minor repairs.  Upgrades I estimate around 1200 which consist of cabinets, vanity, laminate floor, and granite upgrades. 

Comps that I have been looking at are based of web searches, phone calls out to competing units, and physical visit to the competing units to see what is offered. I have asked competing unit on pricing and availability from onsite management and have requested pamphlets on the units and pricing. The property that is the closest competitor based on size of units and offering is 50$ over my current rent and is not including all utilities paid. 

I think I want to answer this in a little more pithy fashion.

1. If you are willing to use last 3 months, you are overpaying, because it should be trailing 12 at least, and it should definitely be the same time period as the one you use for expenses or it is an apples to oranges comparison. That may be fine if you are buy and hold and everything else is in place, it is for you to decide. Some seller's are attempting to use 3 months, but I personally think every buyer should resist and even refuse this.

2. If the previous manager really committed theft and fraud, there should be a police report, shouldn't there? If not, at the very least back to trailing 12 it is.

3. I would check credit scores and criminal background check all these tenants they managed to miraculously add. Some owners will lower tenant standards, hide concessions, etc. (as others have been pointing out to me in completely unrelated PMs) using mgt fees, maintenance expenses, anything they can think of to hide them. NOI looks up, but Caveat emptor. 6 month leases might be part of that.

So those are the things that make me hesitate, but I do not wish to distract from the positive points others have been making. This may be best you will get in the market where you wish to purchase. At the same time, I would beef up due diligence even if it costs a few thousand more.

Your figures for turns and upgrades are very very low. My company has 36 multi family properties in the DFW and surrounding areas and I can say confidently I have seen very few turns at $250 for paint, clean and repairs. There are almost always small replacement expense i.e faucets, disposal etc and "C" properties tend to be neglected by both tenants and the owners. You have to figure in replacement/cleaning expense for flooring as well. It sounds like a great deal but we always plan on high turnover expense after a sale of this kind. You usually find 4-6% haven't paid rent in 1 to 2 months

@Nancy H. :

What is the rate on mortgage? What is your % down? I was expecting the debt service a bit higher. 

Can you explain what went into your expenses number?

Do you have a rehab budget?

I did some quick calculations. I see a COC return of ~6.6%. Just the numbers you have seem optimistic. I've walked apartment deals in DFW for the last 5 months. I would expect an apartment rehab of 3 to 4K on class C units.

If your willing to share a bit more details with me public or privately, I'd work with you to do 3 year proforma.


Medium 44426 awcpropertygroup logo 01  3  cropped whiteAlberto Camacho, AWC Property Group | [email protected] | http://www.awcpropertygroup.com

@Stacey Hampton

The apartments are less than 500sqft. All units have the same exact layout which allows me to buy in bulk. I have also put have a reserves fun for additional repair expenses calculated in my totals. I have received recent rent rolls and see that there are currently 2 tenants that have not paid in full this month.  This seems to be the norm is 1-5 tenants behind on rent.  

@Alberto C. 

Rate on mortgage is 4.5% currently and am putting 30% down. Like I mentioned to @Stacy Hampton, the apartments are smaller than 500sqft and have the same exact layout for each one. This allows me to buy in bulk and take advantage of discounts. In the expense number includes the following: Utilities, Payroll, advertising, contracts, repairs and maintenance, administrative, property tax, and insurance. This NOI is calculated with 5% vacancy.

@Nancy H. , 5% vacancy is too low. We had a big discussion about it in a separate thread and it seemed that many people (myself included) paid too much attention to physical vacancy (which may be 5%) and neglected economic vacancy that should be assumed as at least 15% of gross potential rent on a stabilized property.

Originally posted by @Nick B. :

@Nancy H., 5% vacancy is too low. We had a big discussion about it in a separate thread and it seemed that many people (myself included) paid too much attention to physical vacancy (which may be 5%) and neglected economic vacancy that should be assumed as at least 15% of gross potential rent on a stabilized property.

 I am confused.  I read many articles here on the BP forums about calculating vacancy rates but have not read anything on calculating vacancy at 15% due to economical vacancy.  Could you explain more about this calculation and how this might differ from other things like loss of lease and physical vacancy?  

Originally posted by @Nick B. :

@Nancy H., 5% vacancy is too low. We had a big discussion about it in a separate thread and it seemed that many people (myself included) paid too much attention to physical vacancy (which may be 5%) and neglected economic vacancy that should be assumed as at least 15% of gross potential rent on a stabilized property.

 Based off of what @Brian Burke provided you on the calculation of Economic vacancy we are calculating it at 13%.  So that would be at 2% less than what your recommendation would be.  Thank you for the information it has provided clarity on a few numbers I was still having issues understanding.

Economic vacancy is the difference between gross potential rent (assuming market rent and 100% physical occupancy) and actual gross rent. It is a combination of all vacancy factors (physical, loss to lease, collection, concessions, non-revenue units, etc.)

For example: your subject property rents for $600/mo/unit and consists of 100 units (for simplicity of math). It is 95% full. 

If the current economic vacancy is truly 5%, your current gross rents should be $57K.

Now you look at the surrounding properties and determine that they charge $700/mo for a better quality unit. You want to upgrade your units to be able to charge that price and that is your bench mark: $700*100=$70K/mo gross potential rent.

So, your immediate economic vacancy is $70K-$57K = $13K/mo or 18.5%

Now you take your new gross potential rent and subtract physical vacancy of 10% (long term assumption), 2% for collection losses, 2% for bad debt, 1% for non-revenue units and concessions. Your future gross rent becomes $59.5K. That's the long term number you should use for your underwriting. 

However, you will not get there immediately. Once you take over and start increasing rents some people will move out, some may stop paying, etc. So, your initial economic vacancy may rise above 15% easily (it is at 18.5% already. see above). Again, you calculate a new vacancy factor, apply it to your projected gross rent and arrive to a first year projected NOI (don't forget the expenses!)

Then you use your projected NOI, market cap rate, and cost of needed repairs to determine the offer price.

Originally posted by @Nick B. :

Economic vacancy is the difference between gross potential rent (assuming market rent and 100% physical occupancy) and actual gross rent. It is a combination of all vacancy factors (physical, loss to lease, collection, concessions, non-revenue units, etc.)

For example: your subject property rents for $600/mo/unit and consists of 100 units (for simplicity of math). It is 95% full. 

If the current economic vacancy is truly 5%, your current gross rents should be $57K.

Now you look at the surrounding properties and determine that they charge $700/mo for a better quality unit. You want to upgrade your units to be able to charge that price and that is your bench mark: $700*100=$70K/mo gross potential rent.

So, your immediate economic vacancy is $70K-$57K = $13K/mo or 18.5%

Now you take your new gross potential rent and subtract physical vacancy of 10% (long term assumption), 2% for collection losses, 2% for bad debt, 1% for non-revenue units and concessions. Your future gross rent becomes $59.5K. That's the long term number you should use for your underwriting. 

However, you will not get there immediately. Once you take over and start increasing rents some people will move out, some may stop paying, etc. So, your initial economic vacancy may rise above 15% easily (it is at 18.5% already. see above). Again, you calculate a new vacancy factor, apply it to your projected gross rent and arrive to a first year projected NOI (don't forget the expenses!)

Then you use your projected NOI, market cap rate, and cost of needed repairs to determine the offer price.

Nick thank you for the excellent explanation. The NOI stated from original post is calculating economic vacancy at 13%. I will make note to you comments and save this for future reference.

@Nancy H.

This may seem like a silly question, but how do you know the neighborhood class? I see that alot in these forums and I have no clue how to get that info. Please & thanks!