Deal Analysis - Kansas City Class C property

24 Replies

My girlfriend and I visited Kansas City last month and have been on the hunt for potential properties in the area. I've been in negotiation with an owner of a C-class duplex in Independance. We finally settled on a price of $100k for the property and all that I need to do now is sign the purchase and sale. Surprisingly, the property is in very good shape and the majority of the big ticket renovations have been updated within the last year. Tenants pay all utilities and one of the units is rented for $750. The other unit I'm going to have my PM put on the market ASAP and will hopefully have leased before closing. I've included that placement fee in the management line item. Market rents are around $800 during the summer months, but I've been using conservative estimates in my numbers. Anything bigger is only upside potential.  I've been crunching numbers and came up with the following. Please feel free to critique my numbers. The only thing that scares me about this property is that margins are thin about 3k per year so anything that I missed may make this deal less desirable. Also, I'm a CPA, so luckily I can do my own taxes and don't have to worry about bookkeeping costs.

@Rob Beardsley

Thanks rob for the compliment. It's one of the perks of being in finance/accounting, we work with spreadsheets 24/7.

I 100% agree with you. I almost wish that the apartment was fully vacant so my PM could vet the tenants better. That's why i included an incidental line item in my numbers. I'm guessing that no matter what in a Class C property that a tenant will most likely put a lot of wear and tear on each unit that will not be covered by a security deposit alone.

I could look at spreadsheets all day, but there are some things such as bad tenants that you just can't account for in your numbers. Unfortunately, I wish I had a crystal ball and I could!

Typically on a multi, conventional financing would want 25% down. Did you find a lender that allows for 20% down?

Mackaylee Beach, Real Estate Agent

I am seeing more and more of these spread sheets and none of them have leasing fee's therefore the vacancy factor is under funded.

unless you have a deal with your management company to lease the units for free. your going to have turn over.. everyone does .. and its not common to have a tenant leave and not have a month of vacancy plus a lease fee.. and of course turn over costs.. although I was happy to see your contingency line most folks don't put that in there..

I would also not run performa's on increasing rent every year that will all but gurantee vacancies.

@Jay Hinrichs

Hi Jay - I'm including the leasing fee of one month's rent within the property management number. The management agreement has two fees that are charged -  1) 10% of gross rents and 2) one months rent assuming a 50% attrition rate per year. So I'm not sure am I missing something else?

@Mackaylee Beach

Hi Mackalyee, I won't be running this property out of an LLC (will be using umbrella insurance to cover personal liabilities) so i assumed that lenders would be more willing to lend at 20%, but i re-ran the numbers at $25k down which makes the deal appear to be closer to a 10% cash return in Y1.

I did not catch that.. looks like a realistic proforma then.. good luck with it..

remember turn over kills landlords.. do everything you can to keep good tenants in place.

trying to raise rents 25 bucks then have a 2 month vacancy will take years to recoup..

@Jay Hinrichs curious what you think about this... looks like someone dumping a neighborhood all with different MLS numbers. Hopefully this link works:

https://www.redfin.com/city/13544/KS/Olathe/filter/viewport=38.89598:38.89241:-94.80411:-94.8196,no-outline

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National average for PMs cost is 14.+% after lease up fees and other associated misc expense. Investors could account accordingly vs flat perfect world 10%.

Good luck!

@Jay Hinrichs

I 100% agree with you. With the lease renewal fees any increase in rents are pretty much blown out the window. It's a dammed if you do dammed if you don't type of mentality . Would you only raise rents to market if the tenant is less than sub-optimal and take the initial hit in hopes of a better tenant in the future?

@Matt R.

Where they get you is the lease renewals especially some companies that take a % of first month's rent for successful lease renewals [I've seen up to 75% for some PMs]. Finding a flat 10% PM fee in a perfect world is like finding a unicorn.

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A = You and your family would happily live in it.

B = You and your family could live in it.

C= You and your family could live in it, if it was an emergency. 

D-F = You would rather be camping. 

@Matt R.   A b C D is also a function of AGE.. I have seen brand new habitat homes built in the hood that given the age would be A's but given the neighborhood are C or D..

conversely we see 100 year old homes in need of repairs in gentrifying areas that are A all the way..

its a combination.

@Account Closed   well said.. although I am glad to say as a C student I think I ended up on the shinny side of the penny.

Originally posted by @Jay Hinrichs :

@Matt R.  A b C D is also a function of AGE.. I have seen brand new habitat homes built in the hood that given the age would be A's but given the neighborhood are C or D..

conversely we see 100 year old homes in need of repairs in gentrifying areas that are A all the way..

its a combination.

@Account Closed   well said.. although I am glad to say as a C student I think I ended up on the shinny side of the penny.

Understood. I meant locations/hoods A -F.  

@Joseph Dzwiniarski I don't know where in Independence it is but you need to be cautious with C class multifamily. $100K is on the low side for a duplex which raises a red flag for me. I'd be careful if it's in the Northwest corner of Independence. If you want to DM me with the address, I'd be happy to look at it and give you some thoughts. Also, I think your 5% vacancy estimate is low for a C class duplex.

I am boots on the ground here and can help analyze an area for sure. Independence has A-C grade areas. in my opinion, A is mostly home owner occupied area, newer build. B - mix of home owner occupied and tenant occupied. C - mostly tenant occupied, older homes. Through out independence you will see all areas.

Mackaylee Beach, Real Estate Agent

I agree with some of the other comments.  I think your spreadsheet is great, but I would suggest allowing a higher vacancy rate - specifically in the first year of ownership.  C-class in Independence could have many meanings - depending on the area!!  This will affect your maintenance and "incidentals."  May have an opportunity to decrease insurance costs - is that a hard number you've been quoted or estimate?

Originally posted by @Jay Hinrichs :

I am seeing more and more of these spread sheets and none of them have leasing fee's therefore the vacancy factor is under funded.

unless you have a deal with your management company to lease the units for free. your going to have turn over.. everyone does .. and its not common to have a tenant leave and not have a month of vacancy plus a lease fee.. and of course turn over costs.. although I was happy to see your contingency line most folks don't put that in there..

I would also not run performa's on increasing rent every year that will all but gurantee vacancies.

How is first month's rent placement fee accurately factored into calculating CoC return?

Example: Turnkey Property Mgmt company charges first month’s rent for tenant placement fee with new lease. So does monthly rental income become x 11 months instead of 12 months if I understand correctly?

Originally posted by @Matt R. :

A = You and your family would happily live in it.

B = You and your family could live in it.

C= You and your family could live in it, if it was an emergency. 

D-F = You would rather be camping. 

 This may not be the most accurate description of property class, but it is one of the most entertaining I've heard.  And it is so subjective anyway.

Larry Fried, Real Estate Agent in OR (#201211636)
Originally posted by @Andrew B. :
Originally posted by @Jay Hinrichs:

I am seeing more and more of these spread sheets and none of them have leasing fee's therefore the vacancy factor is under funded.

unless you have a deal with your management company to lease the units for free. your going to have turn over.. everyone does .. and its not common to have a tenant leave and not have a month of vacancy plus a lease fee.. and of course turn over costs.. although I was happy to see your contingency line most folks don't put that in there..

I would also not run performa's on increasing rent every year that will all but gurantee vacancies.

How is first month's rent placement fee accurately factored into calculating CoC return?

Example: Turnkey Property Mgmt company charges first month’s rent for tenant placement fee with new lease. So does monthly rental income become x 11 months instead of 12 months if I understand correctly?

 To accurately account for it, you can include it in your soft costs for vacancy.  Thus if it is one month's rent lease up fee, and you expect the property to turn every 3 years, then divide that amount into 36 months, and add it to your other expected costs.  This is one cost of turnovers which are the most costly part of rental holds.  Thus the most important factor in keeping these costs down are getting quality tenants who will stay in the home for long periods of time and take care of the property while they live there.  

Larry Fried, Real Estate Agent in OR (#201211636)

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