8 Unit Deal Analysis - Would you buy this?

21 Replies

Hey everyone! I was wondering if I could get some opinions with seasoned investors on this deal. The numbers look great if I have everything in correctly (my only questions are property insurance, rehab costs but everything else is pretty much confirmed). 

My biggest concern is the fact that this building is in a small town - the upside is that it is only 30 minutes away from a large metropolitan area and 20 minutes away from a medium sized town from the other side. Would this concern you?

The property: 8 unit Multifamily building. 1b/1b each side rented for $650 each . All occupied except for 1 vacant unit . All tenants are paying as far as we know. Utilities are not billed back to tenants but have separate meters.

Location: small town of 14000 people but like I said, 30 minutes from a large metropolitan area, 15min away from a Kroger grocery store, 20 minutes away from another medium size town on the other side

Listing price: $350,000.

Closing costs: $14,000 (includes agent commission, wholesale deal)

Repairs: $30,000 (very rough estimate)

Financing 75% of purchase price = $262000 . Interest rate of 4.0% Am. Over 20 years, 5 yr balloon. Down Payment of $87500

Total Acquisition Cost = $87500 + $30000 + $14000 = $131500

Gross income: $5200 / month

Monthly Expenses:

PM at 9% = $421

Leasing fees = $433

Maintenance at 10% = $520

Monthly Utilities (currently paid by owner) = $750-1000

Property taxes $267

Insurance = $250

Principal and Interest = $1585

Vacancy at 10% = $520

TOTAL expenses = $4996

CASH FLOW = $5200 – 4996 = $203 / month = $2436 a year

CoC Return without utility billback = 2% ($2436 / $131500)

If I bill back utilities the CoC return would be 10% and would look like this:

Gross Income: $5200

Expenses: $3996

Cash Flow: $1204 = $14,448 per year

Coc Return = $14,448 / $131500 = 11%

What do you guys think? Does the location concern you even though most of the units are currently rented with long term tenants?

Sorry for the long post. Appreciate any nuggets of wisdom!

Cash flow of $203/month is WAY too low for 8 units in my opinion. I like that it's close to a metropolitan, but is there any appreciation value here. At only like 40k a unit and with low rents, I would have to know I could get those rents much higher to make it worth it over the long haul, along with area appreciation or city outflow.

@Justine Ade ,

You did not provide a few key pieces of information without which it is difficult to give you a meaningful advice.

- How big is that metro area and how far is this property from the nearest center of employment?
- Same question about a mid size town
- How does the rents of this property ($650/mo) compare with other properties in the same area?
- What is the median and average income in the 1, 3, and 5 miles radius?
- Provided that the rent is below the market, what improvements would you need to make to achieve that market rent? At what cost?

The most important data point here is the difference between current and market rents. If your property is $250 below, you have a good room for increasing the rents and thus the value of the building. If the market is $650, you have no growth potential beyond 2-3% inflation.

The proximity to the larger cities is less important IF you have enough margin to grow rents.

Regarding utilities bill back, you may have better luck simply increasing the rent by the same amount. It is easier to implement and easier to collect and enforce. 

Originally posted by @Jonathan Greene :

Cash flow of $203/month is WAY too low for 8 units in my opinion. I like that it's close to a metropolitan, but is there any appreciation value here. At only like 40k a unit and with low rents, I would have to know I could get those rents much higher to make it worth it over the long haul, along with area appreciation or city outflow.

Hey Jonathan ! Thanks for the response. My optimism for this property was based on me billing back the utilities which would bring my cash flow up to over $1000 a month 

 

Originally posted by @Nick B. :

@Justine Ade,

You did not provide a few key pieces of information without which it is difficult to give you a meaningful advice.

- How big is that metro area and how far is this property from the nearest center of employment?
- Same question about a mid size town
- How does the rents of this property ($650/mo) compare with other properties in the same area?
- What is the median and average income in the 1, 3, and 5 miles radius?
- Provided that the rent is below the market, what improvements would you need to make to achieve that market rent? At what cost?

The most important data point here is the difference between current and market rents. If your property is $250 below, you have a good room for increasing the rents and thus the value of the building. If the market is $650, you have no growth potential beyond 2-3% inflation.

The proximity to the larger cities is less important IF you have enough margin to grow rents.

Regarding utilities bill back, you may have better luck simply increasing the rent by the same amount. It is easier to implement and easier to collect and enforce. 

Thanks for these details! 

Bigger city population is 900k. Mid size area is 50k

The rents are actually pretty much at market rent between $600-700 for similar size 1b/1b units. Plus I'd still have to at least make some cosmetic updates to this property. So it sounds like based on what you said this would not be worth pursuing since rents are pretty much already at market rate. What if the purchase price was lowered significantly ?

With regard to the utility billback - I'm told the units are already separately metered so I don't think that it would be too difficult to implement? Unless you meant buy in from the current tenants. 


 

I typically see cashflow targets starting at $200 per door from the more seasoned investors. That's after account for the things you mentioned like vacancy, CAPEX, repairs, etc etc. If you are not getting or able to get to $200 per door then it's not worth your time.

You can try to get a lower price which would also improve your cashflow situation. The lack of appreciation in rents is a negative but if you are more concerned about just getting some cashflow and getting your feet wet then just accept that going in.

Also, I'd get second and third opinions on the rehab. Make sure an inspection is done.

Originally posted by @Justine Ade :
Originally posted by @Nick B.:

@Justine Ade,

You did not provide a few key pieces of information without which it is difficult to give you a meaningful advice.

- How big is that metro area and how far is this property from the nearest center of employment?
- Same question about a mid size town
- How does the rents of this property ($650/mo) compare with other properties in the same area?
- What is the median and average income in the 1, 3, and 5 miles radius?
- Provided that the rent is below the market, what improvements would you need to make to achieve that market rent? At what cost?

The most important data point here is the difference between current and market rents. If your property is $250 below, you have a good room for increasing the rents and thus the value of the building. If the market is $650, you have no growth potential beyond 2-3% inflation.

The proximity to the larger cities is less important IF you have enough margin to grow rents.

Regarding utilities bill back, you may have better luck simply increasing the rent by the same amount. It is easier to implement and easier to collect and enforce. 

Thanks for these details! 

Bigger city population is 900k. Mid size area is 50k

The rents are actually pretty much at market rent between $600-700 for similar size 1b/1b units. Plus I'd still have to at least make some cosmetic updates to this property. So it sounds like based on what you said this would not be worth pursuing since rents are pretty much already at market rate. What if the purchase price was lowered significantly ?

With regard to the utility billback - I'm told the units are already separately metered so I don't think that it would be too difficult to implement? Unless you meant buy in from the current tenants. 

If rents are at the market, you have no room to increase them. That includes utility bill back as it is another word for a rent increase. You effectively want to add $120/mo to the rents. Can these tenants afford it? If they can, will they tolerate it or move across the street?

Now, if the rest of the neighborhood is paying for their utilities separately, then you may try to implement billback. Just remember, you're increasing their rent by 20%, will they tolerate it?

If the price lowered significantly ($200K?) your debt service goes down and your cashflow goes up. So there may be some immediate upside but no long term upside because you cannot raise rents.

 

Originally posted by @Account Closed :

Wholesale deal sticks out... you sure the wholesaler is pricing it nicely for you at 350k? 

Financing too. You've got a commercial lender lined up who will go 75% LTV on that?

Sounds like the more I talk to more seasoned investors the less I think this is a wholesale "deal" . The highest I couldprobably go on this building would be 250k based one what I've discussed with others. I do have a commercial lender that is willing to do 75% LTV. They don't know details of location but they know it is near the 900k city so maybe that might change once they know details.

 

@Justine Ade Are those nearby metros appreciating markets with job and population growth? What age and condition is the building? How would you classify the property and location: A, B, C, D? Is it in a “path of progress” location, or somewhere in decline? These will be important factors. Your numbers look reasonable except $30k won’t go very far on rehabbing an older 8 plex so I’d be leery of that estimate, unless all it needs is very light cosmetic updating. For example we just paid $30k just for a new roof on 8 plex. Also if you haven’t I would check on your insurance estimate by getting some quotes. Insurance costs vary a lot by location but that number also looks very low to me (we pay several times that here, unfortunately, but again it varies a lot by location). I also shoot for $200/door cash flow, $350-400/door pro forma so if there isn’t a clear path to achieving that, I’d probably be a hard pass unless it’s in an up and coming area with strong fundamentals.

@Justine Ade

Sorry for my ignorance, but what is the monthly leasing fee?  It must mean something different than what I think a lease fee is as I thought it was a one-time fee and would allow you to not have a management fee.

Thanks

Originally posted by @Steve K. :

@Justine Ade Are those nearby metros appreciating markets with job and population growth? What age and condition is the building? How would you classify the property and location: A, B, C, D? Is it in a “path of progress” location, or somewhere in decline? These will be important factors. Your numbers look reasonable except $30k won’t go very far on rehabbing an older 8 plex so I’d be leery of that estimate, unless all it needs is very light cosmetic updating. For example we just paid $30k just for a new roof on 8 plex. Also if you haven’t I would check on your insurance estimate by getting some quotes. Insurance costs vary a lot by location but that number also looks very low to me (we pay several times that here, unfortunately, but again it varies a lot by location). I also shoot for $200/door cash flow, $350-400/door pro forma so if there isn’t a clear path to achieving that, I’d probably be a hard pass unless it’s in an up and coming area with strong fundamentals.

Hey Steve thanks for this input. Metro area is definitely experiencing job and population growth - really strong market. I'd say this is a C class building (1948 build) in a solid B class area (good school system, decent amount of new construction over the last 5 years, low crime). There are absolutely zero amenities though. 

For the insurance I just received a rough estimate from my insurance agent who said to estimate $4000 , but likely will get something less expensive. 

Agreed I probably should up the rehab budget. I was told the building had "good mechanicals" with a new furnace in the last 5 years but that's about all the info I have. Plus the units do still need some cosmetic upgrades. Perhaps 70-100k would be more fitting.



Originally posted by @Chris John :

@Justine Ade

Sorry for my ignorance, but what is the monthly leasing fee?  It must mean something different than what I think a lease fee is as I thought it was a one-time fee and would allow you to not have a management fee.

Thanks

Hey Chris, 

I think we are talking about the same thing. Here is how I've added it into my numbers. 

Leasing fee = 1 mo rent = $650 

$650 x 8 units = $5200

Then divide $5200 by what you think the average occupancy is in months. So in this example I assumed an average occupancy of 12 mo. 

$5200 / 12 = $433


If the average occupancy were 2 years ( in this case this is realistic as I am told these are long term tenants ) then my leasing fee averaged over those months would by $5200 / 24 = $217

 

Originally posted by @Justine Ade :
Originally posted by @Steve K.:

@Justine Ade Are those nearby metros appreciating markets with job and population growth? What age and condition is the building? How would you classify the property and location: A, B, C, D? Is it in a “path of progress” location, or somewhere in decline? These will be important factors. Your numbers look reasonable except $30k won’t go very far on rehabbing an older 8 plex so I’d be leery of that estimate, unless all it needs is very light cosmetic updating. For example we just paid $30k just for a new roof on 8 plex. Also if you haven’t I would check on your insurance estimate by getting some quotes. Insurance costs vary a lot by location but that number also looks very low to me (we pay several times that here, unfortunately, but again it varies a lot by location). I also shoot for $200/door cash flow, $350-400/door pro forma so if there isn’t a clear path to achieving that, I’d probably be a hard pass unless it’s in an up and coming area with strong fundamentals.

Hey Steve thanks for this input. Metro area is definitely experiencing job and population growth - really strong market. I'd say this is a C class building (1948 build) in a solid B class area (good school system, decent amount of new construction over the last 5 years, low crime). There are absolutely zero amenities though. 

For the insurance I just received a rough estimate from my insurance agent who said to estimate $4000 , but likely will get something less expensive. 

Agreed I probably should up the rehab budget. I was told the building had "good mechanicals" with a new furnace in the last 5 years but that's about all the info I have. Plus the units do still need some cosmetic upgrades. Perhaps 70-100k would be more fitting.

I like C class buildings in B class areas that are on the upswing, but that's all I like. If rents are rapidly increasing in the area and you have great management, it might actually provide positive cash flow in a few years time (once you are able to increase rents). I wouldn't count on any cashflow in the near term though and it could end up being a big money pit. For one thing, it's old (obviously). In the years after WW2 ended builders were slapping stuff together willy-nilly across the country and build quality was often poor. So I'd want to check the condition as a starting point: I'd pass unless the plumbing and electrical has all been recently updated in addition to that furnace. It quite possibly/probably has some asbestos, lead paint, galvanized plumbing supply/cast iron drain line, aluminum wiring/outdated electrical, etc. These wouldn't necessarily be deal breakers if the price was right, but something to consider because they can get expensive to deal with. Your initial cash flow doesn't provide a lot of cushion and it will take a while to build up sufficient Capex reserves to maintain a property of this vintage. I'd want rents to be quite a bit higher to have enough margin to cover Capex. Jealous of only $4k/yr on insurance, we pay a lot more than that here (granted 8 plexes are all over $1M here, so that's probably why).

 

$200-$300 / month in cash flow seems really low. I’m not sure about your market but in mine I can pick up single families with $400+ / month in cash flow and only have to put down 20k.

Can you negotiate the price down or are there any rent/appreciation growth opportunities?

@Justine Ade

Base on all this plus your responses below I would pass.

You are saying the property is at market rents but you need to complete cosmetic work and the only upside is billing back utilities.

Unless those dollars you are spending equal more per month in rent I’d would move along.

Do other properties include utilities at that current rate?

You should be at least $200 per door or it won’t be worth your time.

@Patrick McGrath

Great work on the analysis and seeking BP feedback. Why not present all your data to the seller and say ‘my baseline is $200 per door, in order to get that the price needs to be x.’

If it’s not a great deal, it’s not a great deal. And, to quote Robert Kiyosake, “there is always another wave” aka always another deal. Let it go and take the lessons you learned into the next deal.

@Justine Ade

Go for it! With a purchase price of 5.6 x gross income you can make it work. Get those utilities billed back, fill up that empty unit (that would be a good test piece for a light remodel to see what you could get for rents). A town of 14,000 is plenty big.

Regarding your rehab budget:

30k/8 units is $3750/unit. Im not sure what you are looking to do, but even the basic items would be as follows, assuming a 500sqft unit:

4000 sq ft of flooring (500x8) x $5/sqft ($2 material, $3 labor)= $20,000

4800 sq ft of paint (600x8), 350sqft/gallon @ $35/ gallon x $2.50/sqft labor = $12,480

Appliances for 8 units (Fridge, Stove) = $8000 

That right there is almost $40,000. But if you're planning on doing everything yourself, that could change.

This is also before checking all the HVAC, water heaters, baseboard heaters, exterior paint, roof, etc, cabinets, etc.

This would be a definite pass for us if we were evaluating it. Your cashflow even with billing back the utilities is not worth you time.