First Commercial Deal (Take 3) Thoughts? Advice?

Question

Okay guys and gals, your help is most appreciated here.  I have some residential experience, but now I am trying to take the next big step in my RE life -- a small apt building!  This is out of state, and I already have a good broker and an EXCELLENT management company ready to take over upon purchase.  Now, I just need to find the right damn deal.  I've been through a few dogs so far, and some shady owners, but so far, this deal seems like it has a lot of potential.  It was certainly presented much more professionally than any of the others thus far, which does lend some credit to the owner at least taking it seriously if nothing else.  This is a 13 unit building that have some big apartments.  I'll let the following numbers do the talking for me:

They were nice enough to include financing numbers, at their full asking price of course ...

I know every area is different, but this property seems like it's priced just a little higher than it should be.  I am looking for any sort of issues that may present themselves here that I could be missing.  The only other pertinent info i have from them is that the capital improvements are as follows:

Six 3-bd units have gotten kitchen and bathroom updates

All units have been repainted and floors refinished

New boiler in 2005

600 amp electric

"Some" copper risers replaced in 2015

New HW 97-gallon tank in 2014

So what do you think?

James C. · Answer

Lou,

If I run my analysis and I see the standard $100 - 200/door I tend to think that is a good deal, and warrants a very close look see as to why. A positive monthly cash flow (like I got here) has me reaching for my pencil sharpener. If I get 0 or negative monthly cash flow... Usually, I'll pass unless there is some compelling reason why I like the property (It's been on the market a long time, it's brick, it's got water frontage etc.). If that is the case, I'll work with the numbers until I get to a purchase price I like (or find an issue that stops me), and then go from there.

I'm looking mostly at MLS properties at the moment... so I'm with @Brandon Turner

(from How to Buy a Small MultiFamily Property: A Step by Step Case Study)

• The List Price: For 99% of properties I find on the MLS, the price is far too high and not worth it.
• The Ideal Price: For 99% of properties I find on the MLS – there IS a price that would make it worth it, and I like to find out what it is. ...

Hope that helps!

Jim

James C. · Answer

Lou,

My numbers are below, and come with the following disclaimers:

Ignore returns % (They aren't programmed correctly)

30 yr am and 5% (might be long & light)

I forced 15% of and on my investment as a return (I usually do 10% each)

8% Management (I dropped this from my usual 10%)

7% Vacancy (I dropped this from my usual 10%)

7% Reserves (I dropped this from my usual 10%)

The Management, Vacancy and Reserves are ON TOP of the seller's numbers, which include those items in their expenses.

With my model, I look for positive cash flow after it's all said and done... and this property does that, albeit at slightly lower Return/M/V/R than I like... but it looks like it could be a winner if the numbers hold. (Read: Not responsible if you buy based on my numbers)

I would look at doing a RUBS (if legal etc.) to help boost the bottom line a bit more...

Good Luck!

Jim

Acquisitions

Assumptions

Item

Amount

Vacancy Reserves % (STD is 10%)

7%

Purchase Price

$589,500

Repairs Reserves % (STD is 10%)

7%

Acquisitions/Closing Costs

$5,500

Recoup % (Std 10% On and 10% of Money)

15%

Down Payment = 25 %

$147,500

Management (STD is 10%)

8%

Loan Amount

$447,500

Monthly Rental Income

$10,740.00

Interest (Yearly)

5.00%

Yearly Insurance

$0.00

Term (Years)

30

Monthly Condo Fee

$0.00

Payment

$2,402.28

Yearly Taxes

$0.00

x

Expenses (Aggregate, yearly)

$44,790

Result

Monthly

Yearly

x

Cash Flow (Net)

$329.92

$3,959.08

x

NOI

$4,644.70

$32,786.40

x

ROI

x

2.59%

x

Cap Rate

x

0.67%

x