What am I missing here. Multi Unit Property

Question

Here's the deal. I have 4 Unit Property I bought back in Dec of 2012 located in lower income area ( not a war zone) in the South Suburbs of Illinois very close to Chicago. Most flippers are not buying properties in this area due to the lack of comparable comps and high property taxes.  But here's the thing I ran my numbers with the high taxes on the deal and it still had nice cash flow on the deal. Plus the property is located in lower income area but it right across from the police station. The location played a major part in me purchasing the property as it minimizes the level of problems that I typical will have to deal with with it being in lower income area. The property has  a complete unfinish basement and a added on room that attached to one the units which provides the opportunity to convert the 4 unit to a 5 unit. The add-on room has fireplace so I was thinking to convert that to a 500 sf studio.

I have put about $25k into property already to get  two units completely renovated, update/separate the heating systems in all units, replace some windows, install security doors and some roof repair work on the garage and the building.

Property will rent for as follows:

3 2-Bedrooms  will rent at $ 800.00 monthly $ 28,800.00 annual 
1 Studio $ 550.00 monthly $ 6,600.00 annual
1 2-Bedroom bigger unit $ 850.00 monthly $ 10,200.00 annual  
$50 a month $600 annual for garage parking

Total Annual Revenue $45,600

Conservative Vacancy loss 13%
Management 10%   
(I plan to manage the property myself but still included the management %.)

Operating Expenses:

Insurance  $208.33 monthly $ 2,500.00 Ann
Lawn Care $ 100.00  monthly$ 1,200.00 Ann 
Pest Control $ 20.00 monthly $ 240.00 Ann
Trash Pick Up $ 59.00 monthly $ 708.00 Ann
Misc. Repair Main. : $ 120.00 monthly $ 1,440.00 Ann
Taxes: $ 833.33 monthly $ 10,000.00 Ann (plan to appeal)
Water: $360 monthly  $4,320.00 Ann

Total Expense $20,408.00

To finish up repairs and the leave the property as a 4 Unit. (minus studio)
 Rehab cost is about $45K.  10% interest only  debt ratio 2.28
Monthly Cash Flow $475

To finish up repairs and convert to 5 Unit.
 Rehab cost is about $70K.  8% fix int  debt ratio 2.39

( I would prefer to take $20k out of what I put in if I convert it 5 unit which make my loan amount $90K) 8% fix int  debt ration 1.93
Monthly Cash Flow $605

The only Multi-Unit (2- 4 unit) that  has sold in last 3 months that's within 1 mile radius of the property is a 2 unit for $140,000.

I would think my property would be worth at least that after repairs seeing that its twice as many units.

PS: I have a tenant ready to rent one the units out. City however wont allow me to rent the property until it passes inspection. All repair work must be completed to pass inspection.

What am I missing.. Why can't I getting Hard money lender or private funding on this property... Maybe I am presenting incorrectly..  IDK  O_0

All feedback or comments are welcomed. Thanks

Joel Owens · Answer

It sounds like you bought the property and have sunk in a bunch of money on repairs and you still do not have the property performing yet.

You can't sell a property with a inflated price based on potential. Since the buyer will have to do repairs and lease up the buyer is creating the potential and return and not the seller.

I explain this time an again to sellers that if you want to command a higher price you will need to put in the work. You can't have the cake and eat it too (sell potential at a high price but let the buyer create it).

I also put ZERO weight on newly placed tenants. The tenants are not seasoned. Just like buying a note there is more risk in a newly originated note than one that has been around awhile with on time payments. The same can be said for vintage tenants that always pay on time and have created a positive history at a property.

Tenants that a seller places really quickly to puff occupancy and give first month rent free or half off first months rent or waiver of the security deposit actually hurt the property more than if it was vacant.

The reason is not only do I have to count the property vacant but I now have to go even lower on price to get tenants out that should not be there to begin with. So I will have extra legal and eviction costs and damage to the units when they leave.

Rory Boone · Answer

Patrick L.,  Given that example it definitely makes sense to increase my estimated repair cost.   Even increasing to 16% on repairs ($360).   My Cash flow is $300+ and if I a managing the property and handling the eviction as you did that 10% I allocated for management would not exist and it would offset that additional repair cost by giving me an additional $380 of revenue monthly).

Rory Boone · Answer

Thanks Joel Owens you brought to my attention some points that I did not think of in regards to tenants that have not be "season" in a property. I probably didn't make this clear in my 1st post but I am not looking to sell the property. I want to obtain necessarily financing to finish repairs and hold. I have mortgage broker ready willing to lend on the property once the repairs are completed.

Patrick L. · Answer

Another thing that you have way off is your repair/maintenance figures.  $1,440 total annual repairs for 5 units?  You can easily exceed that number when one tenant moves out and leaves a unit a mess.  You're talking about a low income type area so you should probably budget that to be 15% of gross rents since it also needs to cover big ticket things like mechanical, roof, etc.

I recently evicted someone out of one of my 2 bedroom apartments and in addition to losing 3 months rent (behind on rent, one month eviction, one month to repair and re-rent)  I also had $3,000 in repairs/cleanout.  They had a little lovers quarel and I guess he threw her through the wall repeatedly because there were about 10 person sized holes in the walls.  Every door in the unit was smashed.  The walls had to be repainted from the holes, smoking and misc stains.   They left all of their crap they didn't want and hadn't cleaned the apartment in the 8 months they lived there.  The laminate flooring was trashed from water damage.   That was a $650/month unit and with my $3000 in repairs, $2000 in lost rent and $500 in DIY legal fees (if you can't do your own evictions it's going to be a lot higher and take longer).  So on that one I'm out $5500 or 70% of my gross annual rent on that unit.  You need to account for these types of things because they do happen no matter how good you are.

If you go with 15% vs your repair number it changes your cash flow to almost 0.