12 unit Multiplex deal analysis

5 Replies

Hi Everyone,

I have been doing a few rental properties in the past couple of years and I am now interested in investing in a multiplex. I am currently looking at an opportunity in the Lansing, Michigan Market.

The multiplex is a 12 unit in the North West Lansing area (Old Oakland). I think the area is average (not the best, not the worst). The property is situated in a commercial zone with a few commercial building around it. There is a recycling company one block away and a waste water treatment a mile away. For now I don't think it is necessarily a problem since those seems to be out of sight from the property and there is no disturbance such as noise/smell... but I am curious if anyone thinks otherwise?

The building is in decent condition and currently 9 units are being rented (rents between $600 and $700). 3 units are currently being renovated (paint + new floors). Tenants pay electric and owner pays for water/sewer, gas. The asking price is 420k but I believe I can get it down to 400k or below.

I don't have all the numbers yet but I asked the seller to provide rental history and expense reports etc... I wanted to know what is a good way to estimate the expenses to calculate the cap rate for a 12 unit property? Is the 50% a good estimate for a 12 unit in decent condition in an average neighborhood?

Also since I am new to the multiplex investing, what are the common pitfalls that come when dealing with 12 unit multiplexes? What are the things I need to be extra careful about? What are the mistakes people commonly do when dealing with that type of properties?

Concerning the financing I will be going for a commercial loan. Initial estimate I got was a 20 year commercial loan at 6 to 6.5 interest rate (5 year term). I am not familiar with commercial loans and this seems pretty expensive to me. Does this sound reasonable? I am planning to shop around but wanted to know if it is possible to get commercial loan on 30 year with a fixed rate? What are the standards for these type of loans?

Sorry for the long post.

Waiting for your advice! 

Thanks 

Also wanted to know what is the best way to go about property management for a 12 unit... Do you guys think it is best to find a good property management company or it might be worth hiring someone as a property manager and have him live in the building with free rent + salary ? 

Hi @Patrick G Ndouniama , a few thoughts.

I would be wary about the location--"commercial zone" with a recycling company and a waste water treatment plant nearby? What kind of tenants is that going to attract? Generally, I ask myself "If my daughter told me she and a girlfriend wanted to rent this place after college, would I be okay with that?" If not, think long and hard about investing there.

In terms of cap rate, you'll need to do some research. Cap rates are hyper local, so contact some nearby commercial brokers or other landlords and see what they say.

If you'll be paying heat/HW/sewer/water, I expect your expenses will be above 50%. It gets cold in Michigan... This may actually be an opportunity. There is some new technology, which makes it easy to charge back those costs to tenants without sub-metering the entire building. Check out Ion Energy Solutions. They may not operate in your area, but perhaps can recommend someone local for you.

In terms of financing, the loan above isn't that weird. There are 30-year options (Fannie and Freddie do them, but have a lot of paperwork). You can probably get a slightly lower interest rate and I would definitely want a longer term, 10 years at least. You should expect to put 25% down.

Doing some back-of-the-envelope math, if you get it for $400k, you're looking at cash flow of about $145/door/month after debt service, which isn't bad. Works out to about 21% cash-on-cash return. Again, pretty darn good. This doesn't assume any further capital expenses once you purchase the place. 

Finally, regarding a larger property: 

  1. It will be worth it to do a segregation study and front load your depreciation. 
  2. Is there any further opportunities for income, e.g. laundry or additional storage?
  3. Start looking for a great property manager now. They'll be a key partner here.
  4. Are there any capital expenses staring you in the face? Boiler, roof, electrical system, parking lot, landscaping, mold, water damage. No matter what, make sure you have capital reserves in place, because something is going to come up after you close.

Hi Patrick,

In regard to the expenses, you'll need to get your hands on the historical profit and loss statements and base your projected expenses on those. Since this is your first multifamily, you need to find an experienced management company and run your expense budget assumptions by them. They will manage the property so they should sign off on your budget.

Hello @Jaysen Medhurst thank you for the detailed response. The information you gave is very valuable and useful. We are looking to get the rental history from the current property management company to better understand the type of tenants the property attracts. The good news is that there is a locally famous restaurant right by th complex. In addition our realtor stated that security is very high in the neighborhood due to the centers being present and also the street is very quite after 5pm. The ion energy solution looks very interesting. Have you used it on one of your properties? If so what would you say the biggest con is in using the technology? Is it very costly to install? Lastly we will look into the cost segregation. It looks like it is very valuable. Thank you again!!! 

@Theo Hicks thank you for the advice. We will be getting the financials from the current property manager and base our expenses on that