[Calc Review] Help me analyze this deal - Large Multi-Family

9 Replies

Number's look good on the Cashflow statement, where I have raised eyebrows is the ARV side. That's a very small amount of value increase for the capital flowing in. As @Chris Davis   mentioned the turnover might be high which can have a huge impact on the expected earnings.  What are you using for a vaccancy assumption?

Hey @Geren Knight III , this deal could be solid.  You mentioned the area, and that seems to be my biggest concern for now- its crime rate is 52% higher than the national average, but it has 13% fewer police per-capita than the state average.  Another thing I noticed is that its population has decreased by about 8% since 2000.  If this trend continues, you'd have fewer and fewer tenants to choose from.

That said, the property looks like it'll cash flow even with some conservative assumptions.  I ran the numbers on my own, using what I hoped were the most conservative assumptions I could muster.  Here's the result.  I assumed $450/month for the 1-bedrooms and $550/month for the 2-bedroom, based on a discount off Rentometer median rent rates. I used your loan interest rate of 6%, with a 30-year amortization rate and 1 point up-front. BTW I noticed you were putting down a 30% down-payment- why was that?

I assumed $10,000 in closing costs and $15,000 in repair costs, because with this many units there will almost certainly be something to repair either now or when the tenant moves out. I'd say that's your biggest risk, btw- with 7 units occupied already, there's bound to be a problem tenant. Why else would the seller be divesting a property with numbers *this* attractive? You might be better off doing a cash-for-keys arrangement or declining to renew the leases when they expire (find out when that is, BTW).

I assumed a 10% vacancy rate, which is probably why my expenses are less than yours overall.  Even if I doubled my vacancy rate though, you'd still come out ahead cash-flow-wise, both on both straight dollar amount and on a percentage basis.

The only other things I can think of to make this estimate more conservative would be to bump up your property management fee from 10% to 12%, since we already discussed that this is a rougher area and therefore you'll have to incentivize the best PMs to take on a property like this.

Overall, nice find!  I'm jealous!

EDIT- another major risk factor would be deferred maintenance.  Since this property appears to be off-market, we're lacking information on the property's age, condition, etc.  Additionally, looks like Allegany County isn't super user-friendly when it comes to property records.  I tried to look this property up on PropertyShark.com but couldn't find Allegany in their list of covered counties in Maryland.  I would want to add an inspection contingency to the mix.  Look at major components like the roof, foundation, HVAC, electrical, plumbing, water heater, water and sewer connections, etc.  Problems with one or more of those components could make your up-front repair costs balloon substantially.

EDIT #2- "Property Overview - 12 S Waverly Ter, Cumberland, MD 21502 is a multi family home built in 1910. This property was last sold for $265,000 in 2006. Nearby schools include West Side Elementary School, Braddock Middle School and Allegany High School."  Taken from the Realtor.com link here.  Last sold for $265,000 in 2006?  These schools actually look pretty decent, although with mostly 1-bedrooms, your tenants likely aren't families with kids.  At any rate, looks like you're getting a discount!  I'd be super-curious to know why this is.  Again, why is the seller so motivated?  If something is too good to be true, my paranoid side gets activated.

Keep us posted!

That cap rate is pretty darn good. But similar to what some other have mentioned, that ARV seems a bit low... but I don't know much about the neighborhood which can honestly be a cornerstone of most big investment decisions; familiarity with the neighborhood matters because some neighborhoods are a bit more stable (generally speaking) while some others have high degrees of variance, block by block. What's the neighborhood walk score? Local attractions? Crime rate? School district? Just some of the things I look at but don't want to lose focus on the numbers. Curious to know what others think about those key statistics.

@Richie Thomas thank you for your feedback and analysis. A lot of what you identified were areas of my concern. Since this posting, I contacted another investor in the area that I knew and worked with in the past. He indicated that the area is in fact a very rough section of town and that I would be better off to pass this opportunity up. Is there ever a reason to purchase in a high crime area?

Much like yourself, I thought the numbers look too good to be true. I just wasn’t sure what exactly I was missing. Turns out what I was missing was right in front of me, the crime data.  Is there a specific software or website that you use to verify crime data for a given city?

Thank you again. I will continue my search and post any new opportunities for review.

@Rob B. thank you for your feedback. I did review the walk scores (low) and looked up the crime data for the area; however, most of this area has pockets of crime and within three blocks the crime is very low. This was one area I wasn't 100% sure on until talking with another investor. As I mentioned in my previous post to Richie Thomas. This is a very rough area of town and the numbers seem to reflect that. The ARV should be much higher for that property. I will continue my search and post any future opportunities.

@Geren Knight III I use a combination of City-Data.com and NeighborhoodScout.com, although I'm always open to learning more.  One quick shortcut I've sometimes used in the past is to do a Google News search on the specific neighborhood the property is in, and see what kinds of stories come up.  If it's a lot of police blotters and violent / property crime reports, I know it's a D-class neighborhood.  If it's mostly stories about bake sales and farmers' markets, I know it's an A- or B-class neighborhood.

The one time I *might* consider investing in a D-class area if it was directly in front of the city's immediate path of progress.  For example, if a major university was opening up a new building in a formerly rough area, there might be a need for student housing nearby.  This happened with my university (USC, near downtown LA) right around the time I was graduating 20 years ago, and I wager the folks who bought those properties made a lot of money on those deals.  But these are exceptional circumstances, and depend on the investor having information that most people in the community don't have, so it's probably something that is reserved for investors who are already successful and / or have political access.  Still, it's a great idea to keep abreast of your farm area's development trends and the likely path of progress.  It's something most individual investors likely aren't prioritizing.