Help Me to Talk Myself Out of This Quadplex in Kansas City

11 Replies

Hello BP Community,

As I continue forward with my 2018 resolution to analyze at least one deal per day, I came across this listing on Loopnet for a quadplex in south Kansas City, MO. As Kevin Bupp says, Loopnet is often the dumping ground for RE deals, so I'm mainly using the site as a tool to hone my analytics skills, and to learn how to create my own proforma's rather than take the broker's provided proforma at face value.

The Loopnet proforma for this subject quadplex in KC is kind of all over the place, so I've re-run the numbers with my own conservative estimates. I'd appreciate any feedback on my analysis, especially from investors with knowledge of the area, to help breakdown specifically why this is probably not a good deal given it made it all the way to Loopnet.

# Units4900 sq ft/unit2 bd 1 bath
Avg Monthly Rent per Unit (current from Proforma)$900
Monthly EGI$3,600
Purchase Price$350,000Purchase Cap Rate5.74%
Inspection + Appraisal Fee$1,000
Closing Costs$10,000
Down Payment$72,200DP %20.00%
Loan Balance$277,800
Interest Rate5.00%
Loan Terms (Months)36030 years
Monthly Debt Serv-$1,491
Annual Debt Serv-$17,895
Est. Operating Expense (% of EGI)50%
Est. Vacancy %7%
Annual EGI minus Vacancy$40,176
Annual NOI$20,088
Annual Cash Flow$2,193
Cash on Cash %3.04%
Monthly Rent Ratio (% of Purchase Price)1.03%
Debt Service Coverage Ratio1.12
Debt Yield Ratio7%
Breakeven Rate95%
Gross Rent Multiplier8.71

A couple of takeaways I see:

  1. Cash on Cash of ~3% is not good. An investor would need to look into alternate financing options such as Seller Financing to lower cash-in and increase this metric. Other option would be to raise rents to increase cash flow. Not being all that familiar with the KC market, I'm not sure if this particular area would bear an increase above $900/month for 2 BD 1 BA. Any KC investors want to weigh in here? (NOTE: This appears to be a newly rehabbed property, so upfront CapEx would at least probably be minimal.)
  2. Other metrics such as Rent/Price Ratio, DSCR, GRM appear to at least be in the ballpark of recommended rules of thumb. I used pretty conservative figures of 50% Op Expense with an additional 7% Vacancy, so there's potential for these to be a tad higher in reality.

Are there any other red flags or key metrics I'm completely missing? I'm working to train my thought process to more quickly screen and identify deals worth pursuing, at which point I would take a deeper dive into the individual markets as a next step.

Any feedback is appreciated, and thank you in advance for helping to walk me through this exercise!

Not sure about your area, but multifamily in my area requires 25% down for a conventional loan. Can you use an apartment hunting program to see other rents close by? Their pro forma says $800 in other income- is that laundry or parking or any other guess?
I'm going to guess since you are in CA you aren't familiar with the neighborhood. Google maps will let you see the street and I think it was Trulia that has a crime map function.
A big picture question: If you have $82k to invest, is this one of the best places to put it?
thanks for letting me play along.

It's in the ghetto and that rent seems like a dream, doubt you'll get it.

@Keith Meyer That is a low cap rate for Kansas City. I just located a 4plex for an investor for 155k. 2 units only have 1br each so the monthly rents are going to be 2100 per month. It is about a mile or so from the Chiefs and Royals stadiums. Maybe I should raise the price of that 4plex if some realtor thinks they will get 350k for his listing. Look for off market deals or pocket listings from realtors. 

This would be where a fool & his money parted. 45th & Virginia is not a good area. It is not in south Kc. It’s in midtown just a few blocks off Troost. You will get 600/month maybe. You will not be able to operate these units without being here daily.

You can buy properties in blue springs, Raytown, Lee’s summit for this money & get 900 rent.

I’ll help you out. Just give me the money you were going to pay for this. I will give half back & you will make a better investment.

I will throw in my 2 cents.  That area is extremely bad and I would stay away and not think twice.  The rent of $900 a month is a joke.  You could only get $550-650 a month for those.  You would have so many problems you would have to move here to take care of it.  There are deals all around KC you just have to know the pockets they lay in.  Stay away from this one though it is a pipe dream!

@Keith Meyer

I'm also in CA and invest in KC. If you're going to be successful you really have to know the neighborhoods, there are many that just won't get very high market rents and will have a lot of crime. I'll echo what others have said-your market rents there would be 650 tops. Rentometer is actually a fairly accurate way to get numbers like that. 

Just to give you some feedback on your numbers though:

50% expenses is too high for a fourplex, if it is already renovated just take off what you're actually going to pay for and then have a capex fund for a rainy day. For actual expenses, you're looking at 35-40% tops with a PM company. Capex won't hit for several years if it was actually renovated well, but make sure you have a separate fund for that (not usually included in NOI).

Also, your closing costs won't be that high either. You're looking at closing and inspections to be 2k max. 

You can get a commercial loan with 20% down, 20 year am, 5 years fixed. You can get a conventional loan with 25% down 30 year fixed am. 

Your debt service ratio needs to be 1.25 or better for a commercial loan in KC. I'm not sure how it works for residential loans, that likely would not apply. I use commercial loans so I'm not sure. 

I don't think that just because a deal is on loopnet it is a bad deal. Even on Kevin's show people say that they bought their deals on loopnet all the time. It can also be a good way to learn who the brokers are in an area. You'll find that those brokers, Clemons RE, massively overprice their deals, sell on proforma numbers, and inflate rents to the tune of 300/mo/unit. They must sell them sometimes, but they certainly price WAY above actuals. You'll see that they have a ton of deals sitting on loopnet, that is why! 

When you think about buying properties are you just buying cashflow/yield? There are lots of places that you can buy cashflow and I really think that the value of RE is that you can add-value. I would happily give you 8% returns to borrow your money and go do projects that are value-add! I'm a firm believer that value-add is how you get outsized returns in RE. 

I have a 3 unit for sale in a great area of Kansas City... blue springs. It is off I-70 and Adams Dairy. This area is growing and developing nicely. The address is 251-5 Adams Dairy. If you are interested let me know and I can send you more information as well as a clean and easy to read pro forma.

Originally posted by @Brock Thomas :

I have a 3 unit for sale in a great area of Kansas City... blue springs. It is off I-70 and Adams Dairy. This area is growing and developing nicely. The address is 251-5 Adams Dairy. If you are interested let me know and I can send you more information as well as a clean and easy to read pro forma.

 What are you getting for rents over there? I have a duplex near by ...

Hi @Jay Helms ,

I'd say this doesn't meet my criteria, and I mainly went into this exercise seeking a way to dissuade myself from pursuing a deal posted on Loopnet which after a little digging is exposed as substantially above market value, and is listed with an unrealistic proforma rent rate. Great feedback from the forum on why this particular deal is not worth pursuing, especially pertaining to the market and the availability of better-priced properties in more attractive sub-markets. 

Another impressive showing from the BP community, thanks again all for the feedback.  

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