Property Analysis Manchester NH

7 Replies

What does everyone think of this property? it is a 7-unit located in Manchester, NH and is kind of in the ghetto. It is fully occupied; tenant pays the utilities other than two of the units. Two units do need to be renovated but nothing crazy just some new flooring and paint. I am not sure how old the roof is, but I was told it was in good shape. I plan on having inspections done before purchase. All hot water heaters are newer and has vinyl siding. I am thinking it would be low maintenance for the most part. There is management in place, and I plan on keeping him there to handle the property.

Is this property one that you would buy? According to numbers, it looks like it would be 11% COC. I was really hoping for 12% but not sure if that is achievable.

The money that I would account for repairs, vacancy, and capital expenses, what do you do with this money if you don't have any expenses for the month or year? I was planning on keeping the money in an account until it would reach a certain amount, potentially $25k-30k, enough to cover any damage or capital expenses. Then replenish as needed before I put it in my pocket. Is this what the average REI does?

Do you think I am better off trying to find a BRRRR property? This would be my first property and not sure if I am better of putting $112k elsewhere.

Attached should be the spreadsheet with all the data. 

i

@Nate Wilson

That much cash for 1k a month is the question....

Or purchase 2-3 smaller multi families and try the BRRRR-

Then have all your cash back hopefully in a year or so ūü§∑ūüŹľ‚Äć‚ôāÔłŹ just my two cents

@Justin Tuminowski

Yes that's what I was thinking to get 1k for spending 112k.

In my search I haven't seen any brrr properties in the MLS. Must be hard to come by or mainly off market deals.

Well it's all if you're comfortable with the numbers. Personally, there are many avenues to travel, other than MLS - keep searching! Good luck.

I would love to hear more about what investors do with the money  for repairs, vacancy, and capital expenses. Can I expect to spend that every year or save to a certain number and pocket the rest. 

@Nate Wilson - 

A few observations about your numbers; especially with regard to your description of the property being "kind of in the ghetto" (I think "D location" when I read that):

-W/S: This seems low for a 7-unit. Are the tenants in some units paying their own? Does the city bill them directly or do you have to back-bill?

-Electric & Heat: These numbers are identical? Seems odd so thought it might be a typo.

-Vacancy: A small multi in a D location is going to have more turnover than just about every other residential asset there is. While they may rent easily, you have to consider the time between tenants. I would consider running my numbers at higher than 5% to account for this, or at least do some more digging: talk to owners of other properties in the neighborhood, review ACTUALS rather than pro forma estimates if you haven't already (more on that later). By the way, turnover cost is going to be a recurring theme in my comments.

-Credit Loss: You don't have this in your list, but you should. This type of property is going to experience some tenants who don't pay rent, and you are going to have the financial equivalent of a vacancy while you evict them. A small multi in a D location is going to have more Credit Loss than just about every other residential asset there is. Whatever amount of rent goes unpaid from when they stop paying until you get a Writ of Possession and have them removed, is Credit Loss (don't foolishly think there is any chance whatsoever of recovering it from them). The time that goes by before you have a new tenant in place, is Vacancy. The money you spend while vacant and fixing the damages they did before the Sheriff locked them out is Repairs & Maintenance. If it's in a D neighborhood, you're going to have more of all of these.

R&M: Again, in a D location, you can expect more than $45/month in average repairs. If not, that's great, but assume the worst when underwriting, and double your current figure at least. Also remember that Vacancy will be exacerbated by the degree to which R&M is an issue caused by tenant quality. The more repairs are needed between tenants, the longer the vacancy drags out. And yes, to be through and consistent, it is my opinion that a small multi in a D location is going to have more R&M than just about every other residential asset there is.

CapEx: Capital Expenditures are big ticket items that degrade over time (roof, heating systems, etc). They are generally not caused by tenant quality issues; however, items such as flooring and appliance replacement certainly can be. 10% seems high, but I don't know the condition or age of the building system components, and hey, at least the pro forma assumes worst-case on this line item. Okay, the "small multi in a D location having more X" thing doesn't necessarily apply here, but don't expect major capital improvements to boost value (and/or rents) as much as would be the case in a better location.

Management: 7%, really? Keep in mind that higher turnover not only means higher Vacancy and Repairs, but it also means Leasing Fees (for a 7-unit, each vacancy resulting in a 1-month leasing fee is equivalent to 1.2% of GSI). If you have a management company that is going to charge you 7% of collected rents, and no leasing fees, I can't decide whether you should jump for joy, or run for the hills because it's too good to be true. Personally, if I were to buy a property like this, where tenant quality is going to make it or break it, I would want quality management in place, and I would be willing to pay for it. In fact, I would try to negotiate a turnover disincentive (for example, they get bonuses based on lease renewals, rather than getting paid more every time someone gets replaced).

As you can see, almost every item above is affected by the fact that your property is "kind of in the ghetto". Usually, D location properties look great on paper but the higher vacancy, credit loss, and repairs keep reality well below pro forma. Furthermore, do you expect value and rent appreciation in this neighborhood?

As far as your question about the money that builds up from Repairs, Vacancy, and Capital Expenditures, it is normal to hold onto the CapEx (that's why it is also called Replacement Reserves). The Vacancy and R&M figures are for underwriting purposes. However, until you have enough in your reserve account to handle a large capital expenditure that might be looming, keep feeding that account. Ask yourself how long the roof has left, the heating systems, etc. I think your $25-30K is probably more than safe.

Another thing to note: Take your mortgage payment out of your expenses. It's not an expense, it's debt service having to do with your financing situation, and it has absolutely nothing to do with the performance of the asset. Taking it out will also allow you to more easily calculate Cap Rate and DSCR.

The Cap Rate on this property (using your numbers), is 8.07%. An 8-Cap in a D location needing renovation of a couple units? I think it's overpriced if the neighborhood is truly how you describe it. I also don't think it's even an 8-Cap because the expense assumptions are too low. Hitting it with a 60% OER gives a Cap Rate of 6.4%. In reality it should be even lower because Vacancy & Credit Loss are NOT Operating Expenses. They come out of Gross Scheduled Income to derive Gross Operating Income. Sure, some would argue that since you have the utilities split off, 60% OER is way too high, but that really all depends on how the tenant quality affects R&M. Let's try this (and I think this is generous): 10% Vacancy and Credit Loss; 50% OER: Cap Rate = 7.25%; CoC = 7.87%. Do these numbers justify a "ghetto" 7-unit that may not appreciate over time but is likley to be a PITA to own?

Of course, all of this is conjecture without knowing what the numbers really are. Have you seen a T-12, or just a pro-forma? Have you told the seller that you intend to see the applicable schedules of his tax returns (K-1 or Sch E) as part of the contract contingency? Did your spreadsheet originate from numbers provided by the listing agent, the seller, or your own due diligence?

A bit of a disclaimer: my experience is limited to direct ownership of SFR, as well as analysis, underwriting, and LP investment in large multi and other CRE asset classes. I have never owned a 5, 7, 10, or 16 unit property because, in case you didn't guess it already, I believe that a small multi in a D location is going to have the most risk and least upside than just about every other residential asset there is.

Please make sure to dig into the ACTUAL numbers before you make any investment decisions. If the seller is unwilling to provide them, walk away.

Good luck and happy investing,

Troy 

Originally posted by @Troy Zsofka :

@Nate Wilson - 

A few observations about your numbers; especially with regard to your description of the property being "kind of in the ghetto" (I think "D location" when I read that):

-W/S: This seems low for a 7-unit. Are the tenants in some units paying their own? Does the city bill them directly or do you have to back-bill?

-Electric & Heat: These numbers are identical? Seems odd so thought it might be a typo.

-Vacancy: A small multi in a D location is going to have more turnover than just about every other residential asset there is. While they may rent easily, you have to consider the time between tenants. I would consider running my numbers at higher than 5% to account for this, or at least do some more digging: talk to owners of other properties in the neighborhood, review ACTUALS rather than pro forma estimates if you haven't already (more on that later). By the way, turnover cost is going to be a recurring theme in my comments.

-Credit Loss: You don't have this in your list, but you should. This type of property is going to experience some tenants who don't pay rent, and you are going to have the financial equivalent of a vacancy while you evict them. A small multi in a D location is going to have more Credit Loss than just about every other residential asset there is. Whatever amount of rent goes unpaid from when they stop paying until you get a Writ of Possession and have them removed, is Credit Loss (don't foolishly think there is any chance whatsoever of recovering it from them). The time that goes by before you have a new tenant in place, is Vacancy. The money you spend while vacant and fixing the damages they did before the Sheriff locked them out is Repairs & Maintenance. If it's in a D neighborhood, you're going to have more of all of these.

R&M: Again, in a D location, you can expect more than $45/month in average repairs. If not, that's great, but assume the worst when underwriting, and double your current figure at least. Also remember that Vacancy will be exacerbated by the degree to which R&M is an issue caused by tenant quality. The more repairs are needed between tenants, the longer the vacancy drags out. And yes, to be through and consistent, it is my opinion that a small multi in a D location is going to have more R&M than just about every other residential asset there is.

CapEx: Capital Expenditures are big ticket items that degrade over time (roof, heating systems, etc). They are generally not caused by tenant quality issues; however, items such as flooring and appliance replacement certainly can be. 10% seems high, but I don't know the condition or age of the building system components, and hey, at least the pro forma assumes worst-case on this line item. Okay, the "small multi in a D location having more X" thing doesn't necessarily apply here, but don't expect major capital improvements to boost value (and/or rents) as much as would be the case in a better location.

Management: 7%, really? Keep in mind that higher turnover not only means higher Vacancy and Repairs, but it also means Leasing Fees (for a 7-unit, each vacancy resulting in a 1-month leasing fee is equivalent to 1.2% of GSI). If you have a management company that is going to charge you 7% of collected rents, and no leasing fees, I can't decide whether you should jump for joy, or run for the hills because it's too good to be true. Personally, if I were to buy a property like this, where tenant quality is going to make it or break it, I would want quality management in place, and I would be willing to pay for it. In fact, I would try to negotiate a turnover disincentive (for example, they get bonuses based on lease renewals, rather than getting paid more every time someone gets replaced).

As you can see, almost every item above is affected by the fact that your property is "kind of in the ghetto". Usually, D location properties look great on paper but the higher vacancy, credit loss, and repairs keep reality well below pro forma. Furthermore, do you expect value and rent appreciation in this neighborhood?

As far as your question about the money that builds up from Repairs, Vacancy, and Capital Expenditures, it is normal to hold onto the CapEx (that's why it is also called Replacement Reserves). The Vacancy and R&M figures are for underwriting purposes. However, until you have enough in your reserve account to handle a large capital expenditure that might be looming, keep feeding that account. Ask yourself how long the roof has left, the heating systems, etc. I think your $25-30K is probably more than safe.

Another thing to note: Take your mortgage payment out of your expenses. It's not an expense, it's debt service having to do with your financing situation, and it has absolutely nothing to do with the performance of the asset. Taking it out will also allow you to more easily calculate Cap Rate and DSCR.

The Cap Rate on this property (using your numbers), is 8.07%. An 8-Cap in a D location needing renovation of a couple units? I think it's overpriced if the neighborhood is truly how you describe it. I also don't think it's even an 8-Cap because the expense assumptions are too low. Hitting it with a 60% OER gives a Cap Rate of 6.4%. In reality it should be even lower because Vacancy & Credit Loss are NOT Operating Expenses. They come out of Gross Scheduled Income to derive Gross Operating Income. Sure, some would argue that since you have the utilities split off, 60% OER is way too high, but that really all depends on how the tenant quality affects R&M. Let's try this (and I think this is generous): 10% Vacancy and Credit Loss; 50% OER: Cap Rate = 7.25%; CoC = 7.87%. Do these numbers justify a "ghetto" 7-unit that may not appreciate over time but is likley to be a PITA to own?

Of course, all of this is conjecture without knowing what the numbers really are. Have you seen a T-12, or just a pro-forma? Have you told the seller that you intend to see the applicable schedules of his tax returns (K-1 or Sch E) as part of the contract contingency? Did your spreadsheet originate from numbers provided by the listing agent, the seller, or your own due diligence?

A bit of a disclaimer: my experience is limited to direct ownership of SFR, as well as analysis, underwriting, and LP investment in large multi and other CRE asset classes. I have never owned a 5, 7, 10, or 16 unit property because, in case you didn't guess it already, I believe that a small multi in a D location is going to have the most risk and least upside than just about every other residential asset there is.

Please make sure to dig into the ACTUAL numbers before you make any investment decisions. If the seller is unwilling to provide them, walk away.

Good luck and happy investing,

Troy 

 Thanks Troy for your thoughts and efforts to my response. 

As far as the building location I am not an expert with Manchester area. I consider 75% of Manchester to be ghetto. It's just not a place I would want to live.

I will try and answer or fill you in the best I can.

W/S this is the price I was told from the disclosure. I thought it was low myself and asked my realtor and he thought it was somewhat accurate. The current owner has only owned the property for a year. I believe the purchased it to flip it. So a lot of the cost may not be very accurate. 

Heat and electric- all but 2 units pay there own utilities starting next month so I anticipate that heat and electric for those 2 units will be around 5k annually.

What numbers would you run for vacancy, repairs, and cap ex?

Current management is 7% and he seems to be doing a good job from what I can tell. He really tries to attract better than average tenants. That's why I planned for 7% managment. 

And any pointers on how to account for credit loss? 

Again thanks for the reply.

Nate 

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