9 Unit Opinion Wanted!

19 Replies

So I am looking at a 9 unit house/apartment. 

Cashflow is 30k per year after all expenses. Not including debt service. This is setting a 250 reserve per unit also. I know this is rather vague and maybe not enough info to give a proper analysis. 

(5) 1 bedroom 1 bath

(4) 2 bedroom 2 bath

Most everything is driving distance but within a 10 minute drive.

Unemployment rate in the city: 5.8% 

Population: just over 100k.

Here are some of the Pros and Cons that I was able to get myself while visiting the property

Pros:

School District is very good

100% occupancy with mostly long term tenants.

Rents are SLIGHTLY below market, but not sure if ill be able to raise them currently. Read Cons)

Building is is good shape.

Rooms have nice hardwood floors.

Cons:

House was built in the 60s so it has original windows. 

Roof is about 10 years old and looks to be in roughish shape. No leaks from my tour that I could see. (inspector will look into this more.)

Driveway needs a little work. Still usable but could use a resurface. (not cheap)

Tenants smoke in the building and their room. (this would change under my ownership.)

Tenants are on a month to month (I would also force 1 year lease a couple at a time.)

The tenant mix in the unit next door (separated by a fence) is a little rough. Appears to possibly be section 8. (this is the reason I do not feel the rent raise is quite yet justified.)

What im wondering is what would you pay for a building like this? Or any other advice you would give on this property. I did recently send out a LOI which I will reveal later, but would like to hear any and all thoughts or questions first.

Now, I am quite inexperienced but with the valuation of the pros/cons I feel like 40k/door for the 2bed/2bath would be reasonable and 28k/door would be reasonable for the 1bed/1bath. I mean it also depends on how bad all the cons are like you said. Additionally, I don't know the Michigan area that well neither so my numbers might be slightly misleading.

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Be careful. Month to Month leases are much harder to finance. It also seems like there is some deferred maintenance, which I would request a credit at closing to take care of it. I may also push the seller to deliver the asset with long term leases in place, since he/she has the relationship with the tenants, let that person do the work. The pricing seems high, and you may have trouble financing such an asset. 

@Dan Sears I am only just settling one of my first deals ever soon. Though I might not have provided the best opinion based on experience, I have been reading quite a bit and wanted to put my .02. I've also heard that month-month financing can be iffy like Stephan said and you'd be doing the right thing trying to get longer leases in order to provide security in your cash flow. 

@Mateusz Prawdzik Local Company. 

@Doug Johnson this is a higher CAP rate than the average. I structured a pretty cool offer. I think that it works to my advantage.

Land Contract 17.2% down. 4.5% interest. and 65k below ask. I dropped 3.8% of the down payment to allow for some rehab and not cut into my cash on cash return as hard. I also made it so I am not allowed to pay off the Land Contract before the first 5 years. To allow him to recoup some of the loss on purchase price in interest.

Let me know your thoughts.

1. Tenants are not going to stop smoking just cause you tell them. You will need to upgrade your tenant base. This will mean huge economic losses for 18-24 months.

2. In order to do that, you will need to spend $7,000 - $10,000 per door by the sound of it.

3. Since you are saying that raising rents will be tough, I am not sure that you ca spend this money, unless you buy it down at the front.

3. The basis of underwriting what you'll pay is the following process:

a) Figure out what the thing is worth based on income and in perfect working order.

b) Subtract the amount it'll take to get it there.

What's left is what you can pay - this is the Cash on Cash underwriting method. To take this further, cross over into the IRR, and you will quickly realize that unless you can force appreciation, in real terms you won't be too happy.

Without knowing specifics, and guessing on everything, I'd say that $30,000 of NOI, if you are not able to force appreciation while having to spend $50,000+ on the building is not worth more than $250,000. If you are able to force appreciation $100,000 having spent $50,000 then perhaps you can pay a bit more...

Good luck!

@Ben Leybovich  Thanks for the well thought out response. Some of what you said here is over my head, but it is something id love to learn. 

1. If I did acquire this property one thing I would do is force a new lease, and there would be a no smoking policy in the building and attached would be a fine.  This would either be an upgrade in tenants or cooperation. 

2. The units inside were actually very nice at a quick glance. A little painting and I think they would be good.

3. This is slightly over my head.

I offered 290k, and felt it was a decent offer, but I may be wrong.

Well, there you go - the difference between my offer and yours is the rehab cost. In other words, you capitalized value of the current income, while I capitalized value and the subtracted the rehab - basically that's all it is.

I think $290 is too high. I think you'd do OK at $275, and well at $250.

#3 is all about IRR underwriting and perspective which goes with it. I'll do a webinar on it some day - don't miss it :)

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My only problem is they denied an offer at 300k so I tried to come up with something that made sense.  The cash on cash return seemed to be really good even at the current rental rates. I also figured there is potential for upside. I could potentially leave it as is and make nearly 20% on  my cash.

Originally posted by @Dan Sears :

@Ben Leybovich  Thanks for the well thought out response. Some of what you said here is over my head, but it is something id love to learn. 

1. If I did acquire this property one thing I would do is force a new lease, and there would be a no smoking policy in the building and attached would be a fine.  This would either be an upgrade in tenants or cooperation. 

2. The units inside were actually very nice at a quick glance. A little painting and I think they would be good.

3. This is slightly over my head.

I offered 290k, and felt it was a decent offer, but I may be wrong.

 Dan - if some of that was over your head, you might want to consider holding off on pulling the trigger until it isn't, or partnering with a guy like Ben (if you're lucky enough to find one) on your first couple of deals.

Alternatively, become one of Ben's students if he's accepting them right now. For lesw than your inspection on this building will probably cost, he'll teach you all this stuff. If he was a shameless, self-promoting guru, I'd tell you to stay the heck away - but that's not him.

For my sake - give us all the info if you want help with a real good analysis :-)

@Jason V. as soon as I get more info I will be able to reveal more. 

The basic info I know. At my offer the cash on cash while managed is more than 15% while being managed. The insides of the units are not in bad shape at all. I will be able to inspect further during due diligence. I look at this deal as a learning lesson. This is not me going all in on this deal. I am pretty certain this will not negative cash flow.

Also I would like to get more involved with seminars and any other mentor-ship programs. I am always looking to learn more.

@Dan Sears I guess my point was that, in my mind, you didn't provide the forum with enough information to figure out what a reasonable offer would be. I really admire your tenacity though! I wish more folks who came on BP were actually out trying to make deals instead of playing Monopoly on the internet. 

I think the biggest thing for me would be challenging every piece of information you're given, and look at more than just the obvious things. This property has a $30k NOI - great, but who's doing the accounting? Get the rent rolls and figure out your own NOI using your costs. I don't care what they claim they can run it for - I know what my expenses will be.  My guess on those 1 bedrooms is that they're long term because the current owners let them 1. Smoke and 2. Pay Late/Miss Payments. One beds can be very hard to keep rented (depending on market, like everything else.) Ben's right in that it will be an expensive proposition to turn over your tenants, which will likely have to happen. 

And I'd go into a million other things to analyze, but lots of folks could and would do it better. It sounds like @Tim VandenToorn is going to connect with you and help you with it, which is the really awesome thing about BP.

I know your plan was likely to get into this during the due diligence phase of the process, but I tend to want some or all of this information (although unverified) before I even write an offer. Then again, I focus mainly on smaller MF, where all I have to do is ask for the relevant Schedule E (or the company's relevant tax docs) and then apply what I know my real costs are.

Some folks are fine with writing an offer or sending a LOI with a price based on advertised P&L numbers, but I find my final offer will often be in a different zip code (because listing agents/brokers tend to either not know, or not present factual information - or take sellers at their word.)

I'd be interested to see more information as the deal progresses if you want to share it/keep us updted.

Good luck!

@Jason V. Yeah I recently backed out on a 20 unit in a town over. During the due diligence process the numbers were not what was presented to me. It was more of a proforma. I look at it personally as buying wholesale vrs retail. I am not going to pay a price on what something COULD be. One thing I could do different is sign a NDA and get more numbers before signing a LOI. That is one of those things that is going to be a learning lesson for me.

On my deal that fell through the numbers were not what I liked and I made a different offer during due diligence which was declined so I gracefully walked. To me its non emotional and all numbers. Although I do need to get better with the numbers.  That is why I am here.