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So I've come across this Tri-Plex property that's a new construction in a growing part of town. The city has decided to invest $30MM into the infrastucture and 'cleaning' up the area. The property sits in a class C area, market rents are estimated at $700-$800 and has a good possibility to rent out on Section 8.
The small multifamily market in Huntsville is a little dry and most investors are seemingly making equity moves and some people are theorizing that the small multifamily market is still warming up.
In theory the property is in a great location and could be capitalized on, but I don't want to force the deal if the numbers aren't working. My team is fairly new and conventional lending may not be an option. I would just like to discuss how investors would approach this deal. Should I be accounting for so much for insurance and repairs since its a new construction? What could be some other potential exit strategies for this kind of deal?
Your return is tiny for the hassle of section 8. Your taxes and vacancy may be too high
Question, are you not able to qualify for conventional financing? 8% is ridiculous. Disagree with the other post on taxes and vacancy are not too high. Vacancy may underestimated, turnover prep in this area is going to eat you up. C class is generous. I think your report is optimistic, but that's just my opinion.
I estimated the taxes since there are no county records. The estimation was calculated on the Madison County Tax assessor's page. Also, I agree - Vacancies can get tedious in these kinds of areas. I would still give it a Class C, unless my class ranking scale is inaccurate, could you explain why you say that since you're from Huntsville, @Mike S. ?
If I'm being optimistic on this report, what are the tale-tell signs that give-away that notion?
@Neel Patel Cash flow is negative?
I invest and lend in Huntsville. Your financing is really hurting you. DM me the address and I can give you some more thoughts on vacancy, rental rates, etc. I also should be able to point you in some directions to improve the financing but I have a few specific questions there. I love Huntsville but I think small MF is the only investment I don't like there. However, new construction if you can beat the 1% rule, which you are suggesting, you might have something.
BTW - the whole equation changes if you can live in one of the units. Any chance for that?
I'll defer to Huntsville locals on this, but 15% sounds incredibly high for a vacancy budget. I was listening to this BP podcast episode tonite, and the guest says he rents heavily to this type of tenant, and rarely has one stay for less than 2 years, since it's so hard for them to find a replacement Section 8 living situation.
I agree that the financing seems to be the other big drawback to this deal. I plugged in your numbers with a vacancy rate of 10% and an interest rate of 5.8%, and while the returns are anemic, they are at least positive:
If the property has been on the market for a long time, you may be able to get creative. If the seller is open to seller financing, a 10% down payment and 3% interest gets you to almost $200/month in cash flow, and a much healthier 8.45% cash-on-cash return. 3% is of course extremely favorable, but I've heard more than one BP podcast guest mention rates in that range:
I would love to hear thoughts from other more seasoned investors on this thought process:
By this being new construction, are you able to adjust your CAPEX and Repair reserves? specifically CAPEX since you should have warranties.
Also, another thought, since you set such high reserve % on both of these, at the end of the year 2 you will have a reserve of $7k+ (in theory). If you have no turnover in the those 2 years, you aren't necessarily tapping into these reserves (specifically the CAPEX reserve) and therefore you could actually reduce your percentage or remove it entirely and reallocate those funds elsewhere...maybe into your cashflow. Of course until you have to tap back in, then you would have to build it back up.
So in the first 2 years you are running a negative, but in year 3+, you see a increase in cashflow and CoC/ROI due to increase of rents over the years and reduction in CAPEX reserve allocation.
Curious to hear other's thoughts on this thought process. Do you have to have a budget for CAPEX for the entire time, if you aren't tapping into it?