5-Plex in Florida Analysis & Input

11 Replies

Hey all!  I may have stumbled across a deal in my hometown in Florida this holiday season and am interested in this group's thoughts.  

My background: I currently own two STRs that I manage long-distance, and am interested in diversifying into LTRs.  I have a decent amount of cash on hand but would probably partner with my brother for this deal.  We both have excellent credit.  I have no experience with commercial loans, so that's a big unknown for me currently.

The property:

A 1925 house with a back building that makes up 5 units: 2x 1/1, 2x 2/1, and 1x 3/2, listed at $525,000.  It's classified as a C property but on the edge of B and A class neighborhoods that are quickly developing, and a location that's very accessible to downtown, several hospitals, the airport, and a few blocks from a young, hip part of town.  All units are occupied.

The property needs some updating, but has a newer roof and the listing claims it's been well-maintained; photos show it to be somewhat dated in its layout but with no obvious structural issues. 

The listing hasn't disclosed current rents, though presents them as far below market.  My conservative estimates for market rent are: 1/1 = $825/mo, 2/1 = $1100/mo, 3/2 = $1500/mo.  I'm in preliminary stages of research so I drew those numbers from comps I found online and my sister-in-law's experience of recently living two blocks away.

Allowing for a 10% vacancy rate, I conclude that the overall gross monthly income is $4815.  I estimate monthly operating expenses (including insurance and taxes) to be between $1700-2000.  That gives me ~$2800-3100 net operating income prior to debt service.

Debt service is where I run into questions - I assume a 25% down payment, but since it's a 5-plex, need a commercial loan.  I know those loans are structured differently from residential mortgages, but it's been difficult to find any sort of terms for <$1m loans.  Can someone shed some light on typical terms and rates for small multifamily properties?

Obviously everything would be contingent on inspections and so forth, but if anybody sees red flags I'm missing or something I haven't thought of yet, I'd love to hear it.  Thanks so much!

Julie

it is not easy to get financed properties less than 1Mill or 750K loan amount easily. I would start with US bank(PM me if you need contact) they are pretty active in that space. assume that you should be getting around 5year ARM or balloon depending on what you are choosing with high 4s with 30-year amortization.

As far as property is concerned I think following things 

1. Property management fees?

2. Ask for the rent rolls and see a website like rento meter to know what should be the market rents. 

3. Have you included utility expenses in the calculation?

I hope it helps.

Thanks, Rahul - for the sake of my numbers I've been assuming 5% on a 30-year fixed at 75% LTV, but without much knowledge in commercial loans, not sure if that's at all in line with the kind of product I'd be able to get. Sounds like I'm reasonably close?

1. I self-manage my STRs and believe I could self-manage this as well (I have deep roots in the area so lots of people to call on to be boots on the ground), but could always factor in 10% PM fee.

2. If we make it to serious discussion, I'll definitely be asking for the rent roles; Rentometer views my rent estimates as the low side of "reasonable" for the area.

3. For utilities I've factored in water/sewer, pest control, and yard care; tenants would pay power, cable, etc. I've also included 10% CapEx, 5% Maintenance, property taxes and insurance in my expense calculations.

I may be PMing you about US Bank - first I have to convince my brother to get on board ;) 

Julie,

I’ve got a couple of names and numbers I could recommend on the Commercial side, PM me tomorrow and will send your way. Depending on where the property is located, I would say 5% vacancy is more of what you can expect in most parts of Florida

For commercial I doubt you are looking at 30 year fixed, more like 5/7 fixed with a reset then and with or (maybe)without a 10 year balloon, amortized over 20 or (max) 25 years. YMMV but thats the range I'd be expecting. 30 year amortization would be very unlikely up here...

It seems that you are underestimating your expenses. From your assumptions as to the rent I think your average monthly expenses would be 40% of the gross and that before management fees.

As to loan. I have a loan on a 5 units building, from USBank, 20% down at around 4.1%, 5 years with 25 years amortization.

I hope this helps.

Sorry, 45% of the gross would be more or less your expenses 

Thank you all for your input!  I have adjusted my expense estimations upward, so the numbers are less sexy but still good (more an average of $250/door/month cash flow).

@Moty Wall could you tell me a little more about your terms?  5 years...of what?  This is the part about commercial loans that confuses me - I know the terms are different but haven't found a breakdown I can make sense of.  'Splain it to me like I'm 5 please.  :D  

The loan is fixed for 5 years. At the end of this term I’ll have to return whatever is left of  it or refinance it. The important thing is that the amortization of the loan is 25 years which leaves more cash to you.  You can easily check it with mortgage calculator and see how much you can actually make cash on cash.

I hope it’s clear enough.

Freddie Mac has a small balance loan program for 5+ units. Talk with @Conor Freeman for more information. 

Thank you, @Carol Bloom !  That sounds promising, I'll look into it when things settle down from the holidays. :D

Hi @Julie McCoy ,

You shouldn’t have a problem getting financed once the numbers work, the money will be based on the cash-flow and as mentioned the most likely option will be a 20% down at around 4.5- 4.75%, 5 year / 25 years amortization. You will have a fixed 5 year term after which the loan resets. There are also a number small balance loan programs but you’ll pay more in points with these. I have a number of contacts if you wish.

As far as property is concerned here are my thoughts:

1925 is an older building you might allow greater set aside for capital expenses in case.

In order to get your rent numbers (which is doable) updating these units may be a factor. As high as the prices are where you are, this is not a clear bargain at 105K per unit - Two of those are 1/1 which are more difficult in terms of long term occupancy.

Be mindful of Insurance costs which have ticked up esp. since Irma, your loan may require full endorsement for Wind and Flooding.

I would estimate all your calculations from the Rental Calculator in the BP Tools section, try running a number of scenarios rosy and pessimistic – you may be using these as ‘justification’ with the loan officer you finally work with, everything is a negotiation!

I hope this helps, contact me if you wish.

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