Opinions on this multi-family Class C building deal?

Question

I am relatively novice and looking at a Class C multifamily complex in a MCOL city (Philadelphia, Denver, Minneapolis, Columbus). Quick stats:

• ~30 units
• Safe, low crime, stable neighborhood, but not trendy. Building was built in late 1960s, appears well-maintained (obviously I could be wrong - I need a full inspection)
• Rent is ~$875 for a 1br and $950 for a 2br (probably 5-10% below market)
• Very low renter turnover - one or two units per year. Minimal vacancies
• I have full financials from current property manager. Average over last three years - $330K revenue and $170K net income / year (NI reflects taxes, 5.5% management fee...pretty much everything except debt servicing costs. Also includes reserves of $200/unit/year).
• Based on sale comps, similar building have sold for $80k/unit or $2.4M
• Assuming comps reflect eventual sale price (big assumption), cap rate of ~7%.

Two questions for the smart minds here:

• Based off the info above, would anything make you run away from this opportunity?
• Based on my research it seems I could put 20-25% down with a Freddie Mac small balance loan. For those who have gone down this path, is that actually feasible? Seems fees can be quite high? And need to hit the net worth hurdle.

Thanks! Happy to answer any questions

Mack Benson · Answer

A 1960s build will have a greater capex than $200/unit/year. I've been advised to go to at least $250 and preferably $350 unless the plumbing has been redone.

Check for the brand of breaker boxes and if the property has aluminum wiring, both can be deal breakers on your insurance cost.

You will also want to double check with the county assessors office what a sale will do to the property tax rate. In my area, most of the counties will raise the taxes to about 2% of the new value of the property (you set the value with your purchase price) and they will push it on the taxes at the soonest possible cycle they can.

On a purchase this size I've been told to do between 25% and 30% down in my underwriting but that was a couple months ago and things are wonky in the debt markets right now. I thought the agency debt was going to require 12 months P&I to be escrowed right now so that could be another consideration.

The property management cost may be a little light, I'd double check with PM's in the area because it seems it should be closer to 10% than 5.5%.

A lender is going to have a standard minimum vacancy rate, typical from what I've seen is 5% so that should be included in the underwriting.

All in all there isn't anything you have said that would be an immediate disqualifer in my eyes.

Greg Scott · Answer

I don't believe you can manage a 30 unit at a 5.5% fee unless there is also a significant amount for direct labor included in the expenses.

Insurance has been going up for everyone, so don't use carry-over numbers.

Be sure you understand property taxes. Every state has different rules and in some states taxes can go up significantly upon sale.

Tim Johnson · Answer

Wait, so you're buying negative 30 units (-30), getting -$875 rents and a -7% cap rate?? My head just exploded.

@Sam Edelson, I'm just giving you crap but it's easiest to understand your numbers if you don't include the '-' unless they are actually negative. :)

Sam Edelson · Answer

Thanks Greg & Mack. Really appreciate the feedback and glad to hear no obvious red flags.

• I should have been more clear. The 5.5% does not include majority of direct labor, which lumped in expenses
• Thanks for the tip on insurance, maybe I will get a few new quotes. I will also need to explore the potential of a property tax hike
• I'll increase the reserve capex per unit
• Vacancy rate shouldn't be an issue but good to know. May come into play if I try to raise rents...
• I had heard about aluminum wiring but the circuit panel is new to me. Looks like ~$2k/panel?

Opinions on this multi-family Class C building deal?

Opinions on this multi-family Class C building deal?

Most Popular Reply

4 Replies