[Calc Review] Help me analyze this deal - Multifamily by College

11 Replies

@Aaron Ehrlich , this one could have legs.

  • Always plan a budget for initial repairs. There will be something.
  • Your CapEx and Repairs are probably fine when taken together. Practically speaking the CapEx will probably be higher and Repairs lower. As long as you're putting it aside as reserves, you should be fine.
  • Water/sewer looks low. I'd assume $30-40/unit/month until you can confirm with the local water department.
  • What does the $150/month electric bill cover? If it's just a few hallway lights, you should be able to drive that down.
  • How is heat and HW covered? These old houses are often on 1 system and the owner pays. Make double sure you confirm this. 
  • Lawn care and snow removal?
  • You're missing Management (10%). Include this even if you plan to self-manage in the beginning.
  • Since this is 5 units, it is considered Commercial. I doubt you'll get loan terms that good. Call around to all your local banks and credit unions to see what they offer. I would expect rates mid-4s to mid-5s, term of 20 or 25 years, and you may have to put down 25%.
  • What about the 2 garage spaces? Are those included in the rent? Could they be rented out separately?
  • What's the local cap rate? How does this property compare?

@JaysenMedhurst, thanks a lot for your feedback, this was very helpful! It looks like the electrical is broken into a meter per unit, meaning the tenants could pay for their own electric. I added a 10% management fee, added $50/month in lawn/snow. I researched cap rates in Des Moines and I determined this was a C class building with a cap rate of 6.02%. I also added 2k of initial repairs, but lowered closing costs from 6k to 3k. I also changed the interest rate to 4.5% and a 25 year term. I added $100 a month in additional income as a $50 for each garage spot. I also changed to purchase price from 265k to 250k since the price has dropped even since I initially looked at the listing. With all the changes, the cash flow decreased to $481 a month - quite different than my initial look! Can you think of any other options other than lowering the purchase price to try to squeeze out higher cashflow? I'd be nice to at least have $150 /unit for a total of $750 a month. 

@Aaron Ehrlich , what about the heat and hot water? If that expense is on you, I don't think the deal has any legs.

  • Confirm lending terms with a few lenders. You might be able to find a 30-year product available. Keep what you have in your pro forma until then.
  • I wouldn't remove the electrical expense all together. In the pictures, there is a 6th meter. You just need to get accurate costs and understand what it is powering.
  • Is there a way to add coin laundry? That could pull in a bit of income.

This is shaping up to be nearly a 1.5% deal. There should be a way to make it work well (assuming you're not paying for heat/HW). On that note, 6% Cap Rate on C property is bonkers. Granted, I know nothing about your market, but I find that hard to swallow. When you talk to lenders ask what Cap Rate they're seeing on C-class small MFR. I bet it's closer to 8-9% or higher. Once you really get your pro forma dialed in, take that NOI and Cap Rate to determine about what you should be paying.

Hi @Aaron Ehrlich , if have have an updated calculator summary, I'd be happy to take a look and give my 2 cents. We own many single family homes in the Des Moines area and have typically found that single family homes offer a higher rate of return, but require you to buy more (2-3 in place of the 1 multi-family conversion house you're looking at). A few areas of caution with multi-family conversions... 

  • Make sure you understand your utility (electric/gas/water/sewer) and trash/lawn/snow expenses. These have already been mentioned in the thread, but often 'break' the deal for us on these units.
  • Make sure you have a stable tenant base. These are some of the low-er cost units in Des Moines and that means extra attention to the people you're getting
  • Understand the taxes. Look to see if expiring abatements will increase taxes in the next few years

I'd be happy to hear updates on this deal, and wish you the best if you procees. If you'd like some example single family homes to compare against, let me know.

Hi Chad, that'd be really great! I just spoke with a realtor for the property and got some updated numbers on rent and utilities just this morning. I will update my analysis and repost here (hopefully later today or tomorrow at latest). I started gathering some comps for other multi families in the area. Also, I would love to see some examples of single family homes to compare. Also, where can I find more information about tax abatements for Des Moines?   

@Michael Chilton - we have not filed for tax abatement in the past, but have several prepared to submit for 2019. Do you, or does someone else, have the practical history and experience about abatement success in Des Moines? (for example, as long as you submit legit costs, do you get ~100% of what was requested?)

@Aaron Ehrlich - Here's a potential solution to the utility cost challenge. I'm not sure if the best way to link to an existing post on BP. This is mostly taken from a previous post of mine. Here's a link to the whole thread.

 Calling this info fact, or my direct experience, would be an overstatement at this point.

  1. If you include utilities in the 'sticker price' for rent, potential tenants think your place is too expensive and pass over it
  2. If you don't include in 'sticker price', but then charge them later, they think you're unfair
  3. If you completely divide out the utilities (in our specific 3-units case) the gas, water, electric - the rehab bill goes up $30-40k. Every project is different, but typically the impact is large. Des Moines Water Works requires 3 separate taps on the main line at the street. That means digging and $$$. Gas and electric costs from supply to meter sounded minimal, but on our side of the meter were going to be substantial.
  4. Still need to pay much of renovation costs on our side of the meter with 1 supply point per unit on our side of the meter. Also need to handle the split-out each month.
  5. Have heard property manager concerns about battery powered point of use solutions because of the maintenance.
  6. Have also heard concerns with powered point of use solutions because of reliability, resident tampering, residents thinking it's weird that they are showering with an electronic device attached to the shower head (it it going to electrocute me, is it watching me). Not saying these are legit concerns, but what I've heard from talking to different property managers.
  7. Could do the RUBS math ourselves, but don't want to deal with the administration every month, or the arguments from residents.
  8. Finally, and what we're going to do unless someone tells me to STOP, or the referrals I call tomorrow are not so good.... is to work with a 3rd party that does the RUBS math and sends the bills to either the property manger or residents. The cost is low and is billed back to the residents - actually cheaper than each resident paying for their own meter. Not as fair and accurate as true measuring systems.

I don't think the RUBS 3rd party bill-back is the perfect solution, but the best that we've found for our property.

I'm open to input on this!

@Chad Daniel Not yet. I’m filing for an abatement on my personal residence this year. We purchased it as a flip earlier in 2019 and the person who did the work didn’t pull permits or have licensed contractors do the work. I was worried that I wouldn’t qualify for an abatement, but after speaking with an inspector I feel better. He said to file for the work done that didn’t need permits- siding, interior finish work, roof, etc.

I think you have been given a lot of good advice.  I would be concerned about a 6% cap rate on a C property.  In addition, neither your rent or your property value will go up by those percentages as an average for 30 yours.  Especially in a C neighborhood.  

Unless you have actually locked in that interest rate that might be a little hopeful, also.  You will likely be closer to 5%

I don't think this deal knocks it out of the park but it is probably a reasonable deal.  I would try to purchase for closer to $225k.

Remember to not let your self get excited about any deal.  Emotion is for friends and family not for investments.  When you ask the question, "are there other ways to increase cash flow other than lowering purchase price" it makes me think you are emotionally involved and trying to figure out a way to make this deal work.  You shouldn't have to get creative to make a deal work it should be obvious that the deal works.  If it isn't obvious then it doesn't work.