Multi-family Deal in Michigan

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Multi-family Deal in Michigan

Justin Sadauskas
Real Estate Agent · Washington Twp, MI · Member since 2015 · 27 posts · 4 votes

Hey guys - can you help me analyze this deal through?  

I am considering purchasing a 4-unit multi-family for $230,000.  I would put $100,000 into the property.  This would include completely remodeling all four units, new kitchens, bathrooms, decks, roof, siding, furnaces, hot water heaters, windows, landscaping and a new parking lot in front of the building.  The area is very good with very expensive subdivisions all around.  

PP - $230,000

Renovations - $100,000

Total rent once renovated - $1100 per unit = $4,400/mo

Taxes = $4,700

Insurance = $4,000

Is this a good deal? Secondly, I am a little confused when people talk about cap rate? When people talk about selling at a 10% cap rate are they including operating expenses into their NOI figure? It seems to me they just take gross rent and subtract taxes and insurance and any other fixed costs. Would it be fair to assume that if multi-families are selling at a 10% cap rate that $4400x12 = 52,800 - 4700 -4000 = 44,100. At a 10% cap rate, purchase price would be $441,000? Does that make any sense to anyone?

All thoughts appreciated.  

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Walter Roby jr
Rental Property Investor · Encino, CA · Member since 2016 · 324 posts · 178 votes
9y

You are forgetting Cap Ex, Property management, and Vacancy. Even though you are renovating the entire thing you do not want to leave this out because eventually everything will break. Does the 1100 rent compare to the local market? If rents are high you may have higher vacancy and visa versa. Ask around local PM companies and apartments for vacancy and PM costs for you areas. If standard vacancy for your area is 5% at market rents and PM is 10% then you would have 44100-5280-2640=36,180. If avg cap rates are 8%then all in would be $452K. If avg cap rates are 12% then all in would be $302K. You rate would be 11% Cap Rate at PP $330K.

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  • Walter Roby jr
    Rental Property Investor · Encino, CA · Member since 2016 · 324 posts · 178 votes
    9y

    You are forgetting Cap Ex, Property management, and Vacancy. Even though you are renovating the entire thing you do not want to leave this out because eventually everything will break. Does the 1100 rent compare to the local market? If rents are high you may have higher vacancy and visa versa. Ask around local PM companies and apartments for vacancy and PM costs for you areas. If standard vacancy for your area is 5% at market rents and PM is 10% then you would have 44100-5280-2640=36,180. If avg cap rates are 8%then all in would be $452K. If avg cap rates are 12% then all in would be $302K. You rate would be 11% Cap Rate at PP $330K.

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  • Owen RosenBusiness Member
    Professional · Clinton Township, MI · Member since 2015 · 678 posts · 259 votes
    9y

    Insurance estimate seems high...have you gotten quotes or just an estimate?

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  • Matt Souza
    Investor · Ann Arbor, MI · Member since 2016 · 69 posts · 38 votes
    9y
    The 100k renovation number seems a little low for a full rehab of 4 units. You will also want to factor in holding costs, in addition to the missing CapEx and vacancy costs as noted above. I would be less worried about Cap Rate on a 4-unit and more focused on cash flow and ROI, but that's just me. Good luck!
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  • Justin Sadauskas
    OP
    Real Estate Agent · Washington Twp, MI · Member since 2015 · 27 posts · 4 votes
    9y

    I get that I should have a vacancy rate, operating expense when I am calculating these numbers for my own purposes - my questions has to do with estimating value.  

    I want to be able to exit the property if I need to and since I focus on exclusively residential properties, I'm having a hard time determining what the property will be worth after I'm finished.  I will probably keep it, but if I'm not creating value after putting in 100k worth of work, what's the point?  

    My questions is this:  when an experienced investor is saying he is looking for a 10% cap rate is X area, is he is talking about a true cap rate, with vacancy, and operating expense estimates etc?

    I see so many listings where it's the agent doing some quick math and saying CAP RATE 20%!! and it's nothing close to what I would call a cap-rate - it's so common I was wondering if that there was some other definition used to ballpark prices.

    What is a fair number used to estimate operating expenses? 

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  • Michael Le
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    Hey Justin, a 4-plex is valued like SFR so you're still looking at CMA/sales comp. Cap Rate doesn't come into play here. So that $100k worth of work is only worth it if the ARV, based on comps, makes sense. The income you are able to bring in after fixing it up only factors in terms of cash flow.

    1Reply
  • Justin Sadauskas
    OP
    Real Estate Agent · Washington Twp, MI · Member since 2015 · 27 posts · 4 votes
    9y

    Thank you for all the responses!

    At one threshhold of units would you say that cap-rate becomes the primary factor in determining value?  

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  • David Lilley
    Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes
    9y

    @Justin Sadauskas your NOI = gross rents - all expenses EXCEPT for debt service (principal and interest). The best way to determine expenses is to look at the history of expenses for the property you are evaluating. A quick and conservative way to do this is to estimate that 50% of your gross rent income will be used for expenses; this is called the 50% rule. In reality, I would say expenses would be closer to 40% of gross rents.

    Multi-families are considered commercial at 5 units and above. This is when Capitalization Rate will come into play.

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  • Walter Roby jr
    Rental Property Investor · Encino, CA · Member since 2016 · 324 posts · 178 votes
    9y

    @Justin Sadauskas Multis 5+ units are considered commercial and that is when Cap raes come into play. In regards to the 20% Cap rate listings; it's good to run your own numbers and not believe the ads. If you show a 10 Cap to that experienced investor with those numbers included I bet you would have an offer.

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  • Adam Daneff
    Rental Property Investor · Charlevoix, MI · Member since 2016 · 51 posts · 13 votes
    9y

    Justin,

    Maybe I read that wrong but you put.

    4400x12 = 52,800 - 4700 -4000 = 44,100. At a 10% cap rate, purchase price would be $441,000

    You should base your purchase price off what the current rents are not what they will be after you put $100k into it. Buy based on current cash flow, that's your equity your giving away. I wouldn't pay more for what I think it will do

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  • Justin Sadauskas
    OP
    Real Estate Agent · Washington Twp, MI · Member since 2015 · 27 posts · 4 votes
    9y

    I'm not paying $441,000 - thats what I was hoping it would theoretically be worth.  

    My purchase price would be around $230,000.

    0Reply
  • Scott Matthew C.
    Real Estate Broker · MI · Member since 2014 · 594 posts · 183 votes
    9y
    Justin Sadauskas at this point in time you're spectating. Please don't take offense. Write up a "Letter of Intent" (LOI). NOT AN OFFER. That way you can collect the necessary info and make an educated offer based on your requirements. You can also require a commercial BPO pro bono of course. If the BPO is in your favor it will only strengthen your offer price. The numbers do not matter until you can get your hands on the real book of business from the Seller(s) Best of luck.
    0Reply
  • Justin Sadauskas
    OP
    Real Estate Agent · Washington Twp, MI · Member since 2015 · 27 posts · 4 votes
    9y

    The seller does not have a real book of business.  The asset needs 100k worth of work and has no renters currently.  I don't need a loan to purchase so I'm not sure advice applies in my situation.  

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