Milwaukee Mixed Use Multi-Family Deal Analysis
Hi all!
I am looking for a little help and insight on a mixed use multi-family deal I am working on in Milwaukee, WI. There are some interesting facets to the deal that I would love some advice on and also help in determining the value. It is a C class property in a C+/B- area located on a main thoroughfare. The specifics and financials are below:
3 Story Mixed Use Building
- Total square footage: 4,920 sq. ft.
- 1st Floor: Commercial Office Space - 1,400 sq. ft., 4 offices, reception area and conference room
- Current rent - $650/month
- 2nd Floor: 2 apartments - 700 sq. ft., 2 bedrooms, 1 bathroom
- Current rents - Unit 1: $650/month, Unit 2: $650/month
- 3rd Floor: 1 apartment - 1,600 sq. ft. 3 bedroom, 1 bathroom
- Current rent - $800/month
- Total rents: $2,750
- Includes .26 acre build-able vacant lot
- Insurance: $4,400/year
- Taxes: $12,623/year
- Average Commercial Lease in the area: $13 per sq. ft./yr
- Average area cap rate: 8%
Asking price: $365k
As you can tell by looking at the numbers, the property seems to be mismanaged (low rents) and has quite a bit of deferred maintenance to the tune of about $100k in work. This would include a new roof, fixing leaks on each floor and renovating all 3 of the residential units. A big questions are what should I actually be paying for the property, how much is the vacant lot worth and what would the property be worth after I completed the renovations. There also would be a potential to house hack the 3rd floor unit. I am conservatively estimating the potential rents per unit (post-renovation) at:
- 1st Floor: Commercial Office Space - $1,100/month
- 2nd Floor: 2 apartments - Unit 1: $1,000/month, Unit 2: $1,000/month
- 3rd Floor: 1 apartment - $1,500/month
- Total rents: $4,600
Please let me know you thoughts and any additional information/questions you have. Thank you!
Hey @Jordan L.,
First I would ask, where is the property? And do you see any building happening there? Buildable lot is okay, but there is not that much new home construction happening within Milwaukee itself, and as I was just talking to a in house realtor with a builder yesterday, profit margins are only impressive with new builds on higher priced homes, and that's with them having everything in house. (Though, admittedly, I know nothing about spec building or building on contract, I was just picking this guys brain but drew the conclusion that it wasn't necessarily as lucrative as I might have thought).
What are vacant lots selling for in the area you're looking? And are people buying them? I live in Riverwest (say what you will), and I can buy a lot down the street for 10k, but do what with it?...
Also, if you're talking about a B- to C+ area I'm not sure where you're charging 1500 for a 3 bed and 1000 for a 2 bed. And even 1100 for office space sounds potentially high. My broker is listing the lower office space on 113th and Bluemound for $650 if I'm not mistaken (a bit smaller).
What is your pro forma cap rate with that purchase price and considering that 100k invested?
Don't know anything about expenses on the property but you'll have to know all of that to the best of your knowledge to start estimating these values. The vacant lot is tricky, however, because I'm sure the seller thinks it's worth a ton.
And I'm no expert, by any stretch, but just some questions that occurred to me as I was reading this.
Best of luck, and keep us posted,
Best,
JTM
So the property actually is located in the Halyard/Brewer's Hill area. I could see the lot being used for additional commercial development, apartments/condos or a parking lot (potentially developing myself). There has been a decent amount of construction over the past 5 years, but wouldn't value it any higher than $30k.
Pro forma at a $365k purchase price with another $100k in improvements would be about a 5% cap rate.
Expenses I am figuring after increasing the rents and financing on a 203k loan:
| EXPENSES | Monthly | Annually |
| Real estate taxes | $1,000 | $12,000 |
| Insurance | $417 | $5,000 |
| Vacancy/Repairs (15%) | $460 | $5,520 |
| Property Management (8%) | $368 | $4,416 |
| PMI (1% of loan) | $374 | $4,487 |
| Water | $133 | $1,600 |
| TOTAL Expenses | $2,752 | $33,023 |
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@Jordan L. regarding the insurance, the rate looks a little high. Is the building in rough shape, fuses maybe? This could be driving the rate up.
This type of building should have a rate per $100 of building value of $0.50-$0.75. So, if you are insuring for $100 per sq/ft & the building is 4,920 sq/ft, you would insure for $492,000, or $500,000 to round up.
If the building is old, but in decent shape, there are premium options for Milwaukee buildings like this for $0.60-$0.75 X $500,000/$100 is a premium range of $3,000-$3,750. If it is really nice and completely gutted, this goes much lower.
Good luck with it.
@Jason Bott thanks for the reply. The building is old (1880) and I would say it is in rough to adequate shape. Definitely has some deferred maintenance, and needs a new roof. Doesn't need a complete gut though. Electrical is updated. This helps and shows an opportunity to lower expenses. Thanks again!
I would take a hard look at your rent numbers. I think you are being extremely aggressive with $1000 for a 700 sf apartment in that part of town. Have you done a market analysis of comparables?
@Russ M. I agree with what you are saying but there is more to the story.
So here is the interesting thing regarding the property. The first floor commercial space and one of the smaller 2 bd apartments are being rented to one tenant for a total on $1,300. The tenant is using the office space and then turning around and subleasing the 2 bd apartment for $1,000. Hence my mismanagement comments.
I agree with Russ. I think your projected rents are not realistic for that neighborhood
What would be realistic? Biggest reason I am using those is because that's what the sublease currently is.