Deal or No Deal: Cleveland, OH Commercial

10 Replies

Hi, I have a deal and was wondering if someone can give me some advice. 

This is a 6 unit commercial building in Cleveland, OH. IGNORE the fact that this probably won't appreciate much. Assume buyer looking for CASH FLOW. Assume that buyer has little risk of not able to pay the balloon sum. 

Deal or no deal? @J. Martin , @Paul Choi , @Andrey Y. Others please also feel free to comment. 

-------------------------------------------------------------------------------------------------------------------------------------------------------------------

The seller purchased this almost entirely vacant and highly distressed asset in cash in 2016 and has had X company handling the management and renovations since. Now that the project is almost entirely complete the seller to recoup his cash and collect the interest on the mortgage he is holding. 

Sell price: 

$234,900

HIGHLIGHTS:

  • Mortgage Terms
  • 35% down payment
  • Amortized over 30 years with a 7 year balloon
  • 6.5% interest
  • Rent Roll
  • Unit 1 3 beds /1 bath. (Over 1k sq ft) Renovation under way. Market rent $750/mo
  • Unit 2 1 bed / 1 bath. Currently leased $535/mo
  • Unit 3 1 bed / 1 bath. Currently leased $495/mo
  • Unit 4 3 beds / 1 bath. Currently leased $725/mo
  • Unit 5 2 beds / 1 bath. Currently leased $625/mo
  • Unit 6 Retail. Currently leased by a Barbershop for 5 years. The business owner is making
  • renovations to the unit and the rent is tiered. The rent will top out at $700/mo
  • Total Gross Rent $3,830/mo
  • Highlights
  • Each unit is separately metered for gas and electric (Tenants pay)
  • Over $100,000 worth of work performed by Property Company representing the seller since 2016. Including a brand new $50,000 roof in 2017
  • Current property taxes $4,377/year
  • Owner pays water & sewer
  • As this was a complete renovation there are no historical financials

@Lena Wang based on the rent amounts, I am assuming this is located in a C grade neighborhood? I may know the exact property you're describing.

Few things to note - unless the property is held in an LLC and you acquire that said LLC, you will likely pay taxes of $8,500/year NOT $4,377/year, as the county will reassess the value to your purchase price.

Nice to see sub-metered gas and electric. Budget for water and sewer costs of $75/unit on average, a bit more if you have more occupants in the 3 bedroom units.

Does this place have a dumpster? If so, that's an additional $150/month to add to your expenses.

Best of luck, do your due diligence, and feel free to reach out if you'd like broker representation, I'm confident one of my investor focused agents can guide you well.

@Lena Wang   Looks like a decent deal on paper.  Have you ran a BP rental calculator?  I quickly plugged some numbers in and it looks like you would be cash flowing $1000+ total,  after including maintenance, capex, property management etc.  Down pay is quite a bit...35% ~$80k. 17.39% cash on cash ROI

Like Jad said, put it in a LLC to offer some protection.  Is the neighborhood decent?  For example, there won't be a mass exodus of people?

@Paul Choi Yea i plugged numbers in the calc and got similar numbers. Cap rate was like 11%. I have to do research on the area, neighborhood, etc. 

I THINK it's a C neighborhood. If it's a D i'm not going to buy there. THANKS!

@Lena Wang ,

To be honest, I don't know a damn thing about Ohio. So I think talking to some locals would be best. Make a post here with names of other nearby cities, to hit some keyword alerts. Take into account what @Jad 

@Jad Boudiab undefined said.  Maybe check with @Engelo Rumora . 11% cap rate is definitely on the high side, if calculated correctly. You may be able to get less than a 6.5% rate, but you'd have to shop around for lending in that market. I know other well-heeled folks getting half that interest rate (albeit in better/more metro locations..). 

Call other Multifamily agents in the area and ask them for the marketing packages on the other deals they have in the area. What do the expenses look like? What is missing from yours? What is higher or lower on yours? 

What are the market rents? What are the current rents? Check CBRE, Marcus & Millichap, etc. 

What kind of neighborhood is it? (start w/ city-data.com for demographic, income, and crime info, in addition to more..) 

Hope that helps! Good luck :)

Feel free to reach out. I’m a multifamily broker with Marcus and Millichap based in Cleveland and can tell you probably within the matter of 10 seconds if the market rents are accurate and the class of the location.

Originally posted by @J. Martin :

@Lena Wang ,

To be honest, I don't know a damn thing about Ohio. So I think talking to some locals would be best. Make a post here with names of other nearby cities, to hit some keyword alerts. Take into account what @Jad 

@Jad Boudiab undefined said.  Maybe check with @Engelo Rumora. 11% cap rate is definitely on the high side, if calculated correctly. You may be able to get less than a 6.5% rate, but you'd have to shop around for lending in that market. I know other well-heeled folks getting half that interest rate (albeit in better/more metro locations..). 

Call other Multifamily agents in the area and ask them for the marketing packages on the other deals they have in the area. What do the expenses look like? What is missing from yours? What is higher or lower on yours? 

What are the market rents? What are the current rents? Check CBRE, Marcus & Millichap, etc. 

What kind of neighborhood is it? (start w/ city-data.com for demographic, income, and crime info, in addition to more..) 

Hope that helps! Good luck :)

I don't know the area but I'm buying multifamily across Ohio for all in $15,000 - $20,000 a unit

So a 10 unit complex I'd want to be i for $150,000 - $200,000

Needs to be B- area at the worst

Much success

Originally posted by @Paul Choi :

@Lena Wang   Looks like a decent deal on paper.  Have you ran a BP rental calculator?  I quickly plugged some numbers in and it looks like you would be cash flowing $1000+ total,  after including maintenance, capex, property management etc.  Down pay is quite a bit...35% ~$80k. 17.39% cash on cash ROI

Like Jad said, put it in a LLC to offer some protection.  Is the neighborhood decent?  For example, there won't be a mass exodus of people?

35% because it's Seller Financed. Seller makes their own rules when they carry the loan and offer this to potential buyers

As @Federico Gutierrez pointed out this is an investment marketed on BP by Holton-Wise. It has already been pointed out that property taxes will significantly increase some time after the sale. Buying the LLC is not necessary protection against this happening as the county is aware of the practice and can / does dig a bit deeper to figure out if there was a sale event.

I also noted that in the marketing, it stated that of the 100K spent on the property, 50K was the roof. A couple of points;

- For such a such a small roof (3,000 sq ft??), this sounds very high even if they did a full tear off down to the joists. Perhaps there were some rotten joists; who knows.

- Even taken at face value, that means that 50K was spent on the rehab of the 5 apartment units (~10K per unit). While the pictures look pretty, I would be concerned regarding what is behind the walls. In my opinion, a 'complete renovation' would normally cost more then 10K per unit but then it depends on what they mean by 'complete'.

There are lots of questions to ask and have answered before you can determine to move forward of not;

- Statement of work (SOW) regarding work done

- What is warrantied and for how long

etc.

Also while this is not a 'turnkey' as it seems that HW does not own the property, they are certainly intimately involved.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.