What's up BP!
I have a deal that's mine for the taking. It has some distinct positives, and some major negatives. I'm looking for your quick input -- would you go for this one? Yes? No? Bonus points if you give your 1-2 sentence 'why'. Thanks for the input!
Actual purchase price: 80K (cash purchase / may refinance later)
Units: 8 (2br/1ba each)
Management: 10% to manage / nothing to place tenants
Flood insurance: 2400/yr (yes, it's in a flood plain near a river)
Solid management in place (for years) that is eager to continue. (Yes, I know how to vet PMs.)
Lots of CapEx in the past two years, mostly updated units.
New roofs / new plumbing in most / new HVAC / etc.)
Block bombproof construction
Property has been cranking out greatly increased cash flow each year.
2016 - the true net after ALL expenses, management, and repairswas about $800/month
2017 - the true net after ALL expenses, management, and repairswas about $1,200/month
2018 - so far this year, the true net after ALL expenses, management, and repairs is about $1,600/month
I have actual bank statements / tax returns / P&Ls to verify all of this
Many tenants have been there for 5+ years
Very low vacancy rate
All tenants current on rent
Neighborhood is terrible. Definitely a 'D' area. Someone got shot down the street two weeks ago.
Stagnent local economy. I highly doubt this place will appreciate anytime soon.
No rent increases in sight. Rent is definitely market.
Flood plain (see above)
The reason for the net increases is that there have been a lot less repairs so far this year, due to all the Capex and repairs made over the past two years. That's a good thing, but it's not like the neighborhood is improving and the rent is increasing.
It's a lot of cashflow, and a lot of headache. So -- would you go for this?
If you are good with the long game, I don't know why not. If most of the CapEx is done and done right with the cashflow you could be free and clear, all your purchase money back in your pocket within 5-6-7 years... I also think where you are at in your investing career/portfolio plays a part too... if it completely blows up in your face, will the 80K kill your business? The things I like most:
*Low entry cost
*Management wants to stay in place and by your words is solid... these types of properties definitely take a special touch
*I think there will always be demand for this type of housing... because it is dirt cheap
*Most CapEx done... major updates/renovations on the horizon would kill this deal, IMO
I like the numbers. Seems like your COCR would be pretty good especially since there's been Capex and repairs made over the past few years that you probably wouldn't have to do for several years... I've read a lot about the headaches that can come from D neighborhoods...
If you're willing to handle some possible headaches in exchange for some potentially solid cash flow, then go for it and keep us posted as time passes after you go for it (if you decide it's worth it)!
I would buy assuming certain conditions. Are you prepared to take on the responsibilities of a D property. Keeping in mind at some point you might have to change PM for some reason.
I strongly advise you base your decision on the 2016 cash flow of $800/month. Expenses are based on long term not yesterday. Your costs will rise considerably over time. Cash flow $800/month no more. Annual rent increases based on cost of living index.
Additionally, based on the opportunity value of cash (min. 10%) this investment will only work if you refinance to the maximum possible. Leaving 80K dead equity in this property will completely kill your real cash flow from the property.
If you can manage a D property with $800/month cash flow and can refinance out your equity I would consider it.
I would say no depending on your experience.
Unless all CAP Ex has been completed, there may yet me more large expenses. Like you said you are buying at max retail so any potential cap ex that comes up would be right out of your pocket. Class D properties look great on paper but provide so many headaches they normally aren't worth it. Even with a manager things may arise that cause you stress and take your money.
Unless lower class investing is your main focus and you have the capital and comfort level in this arena I would not do this deal. You said there is no appreciation in site, I think it would be better to find a multi family in the "path of progress" or even in a better area that will be stable, with potential upside, as opposed to this deal that seems mostly negative.
Be sure you aren't talking yourself into this one. If I am not comfortable being there, I wouldn't buy it. If your property manager goes under, you may be in trouble.
I agree with @Thomas S. but based on what you said about the property, I would be surprised if this is a financeable/refinanceable property.
And probably most importantly, if that PM decides to wash their hands of the property, what's the backup plan?
For me personally, this property is a "no go". All the negatives you mentioned are a big red flag for me plus I personally see that at $350 a month, its hard to make enough reserves for future capex (per unit). I would love to hear what more experienced investors have to say here.
Is the deal listed on the public market? Any indication why the current owner is selling if the property truly generates the numbers posted above? What % of the tenants are on subsidized housing or some other related program? Do all units have separate utilities? Have you personally walked the property/street yet?
@Ryan Jopson Yep! It's listed. But I'm not giving out the listing info! :-)
None of the tenants are on subsidized housing. It's all 'market' tenants. All utilities are separately metered and paid by the tenant.
I do not know the owner's motivation for selling. My guess is that they're sick of the headaches and ready to pass it along. But that's just my guess.
If it generates that amount of cash flow it will always be worth 80K, + or - to some investor out there. If its an absolute nightmare; wait it out 5 or 6 years until you get your 80K out and then re-sell. Your re-sell number is your true profit.
If your level of certainty is high that it will re-sell for somewhere in the ballpark of 80K; then I'd pull the trigger.
It really is just a different angle of thinking about the deal. Maybe it will help put things into perspective.
What are your thoughts on this?
I would do all I can do to get the purchase price down, way down. I would turn the units into section 8 units and raise the rent to market/above market if possible. I have a few D properties and they pay great. Go for it.
@Ryan Jopson I understand what you're saying. I think the place makes money over time, both in cash flow, and what it can eventually sell for. However, I am pretty sure it will be hard to finance. So it will tie up 80K cash. Here in Atlanta, I could refinance it in a heartbeat and pull all of my money out. But in this area, and being in a flood plain, it is going to be nearly impossible to finance it. That's the true hangup.
If you can not refinance your 80K, with a opportunity value of 10%, is producing $666/month of your cash flow right off the top. That means the building itself , based on $800/month positive cash flow, is only producing $133/month. This deal is not worth your time if you can not pull your cash out. Don't count on cash flow being above $800, rents are simply too low.
Not worth even a side glance.
This would be a hard no for me. I simply refuse to deal with D class properties. If projected cash flow was considerably higher I might think about it, but in the end it would still be no.
I'd steer clear of this one. It's going to be tough to cover CapEx and maintenance with only $350/mo and the risk just doesn't seem worth the reward.
Someone has to buy, manage, and maintain class "D" properties. Personally, I know that's not for me. Some people may make their money there and all the more power to them, but it wouldn't be me no matter how good the numbers are.
However, this sounds like a numbers game to you, so I see the COCR is around 20% and based on the true net of $1600 it sounds like you've provided us all the expenses.
I always like to run numbers personally so see what I input below and make sure its correct. Frankly, again, I don't think I would invest in an area I wouldn't personally feel comfortable living. The fact that the property makes money hand-over-fist, and the current investor is leaving (for unknown reasons?) makes me nervous.
This would be a hard yes for a slum lord like me ! Your typical investor will run for the hills on this deal but there’s a lot of upside and fear drives a lot of those decisions . Low income areas can have great cashflow if managed right . An 8 unit for 80k even in the hood is a great deal . Those people need to live somewhere and nobody is a homeowner in these areas . Somebody is going to get that rent money it might as well be you ! I’d bet it has a low vacancy too . Look you don’t have to live there or hang out in the area . There’s perhaps a chance You might be able to bump up the rents to 375-400 ...Plus pepper spray and bullet proof vests are tax write offs !
There is no doubt that this class of property is not for everyone, but I find it funny that so many folks just want to RUN and then they will say "it's all about the numbers" in another thread. If it is purely about the numbers you use for every other property... allocations or %'s are the same, I don't see how you can't use that logic here. There is no doubt if you can't refinance your money out the only play is being willing to be in it for the long haul. I would explore the section 8 route as I think that improves the scenario. I think the biggest question is can you use your $80K to generate more cash flow or a better cash on cash return?
There is a place for every type of investors. Not sure you get storms. Claim insurance loss and sell?
My assumption it is for government voucher renters.
$350 a door, run Forrest run. Run away from the shoot em up bang bang tenants, as fast as you can.