All Forum Posts by: Scott Skinger

The warning against using cap rate is for a  few reasons:

1. You can't come up with a realistic offer price using a cap rate and an actual NOI on a property that is unstable. This property is probably negative cash flow when you look at their real actuals and factor in your expenses.

2. You need to buy at a price that is providing you cash flow after all expenses and debt, regardless of cap rates

3. And once you get a handle on what the actual NOI is a 7 cap is probably too much to be paying for a 8 unit class c building. In 5 years you will have to sell/refi and it is conservative and wise to underwrite the sale at higher cap rate so you don't end up selling for a loss. In the Chicago market I would be targeting buying a class c train wreck 8 unit at closer to a 9-10 cap.

@Matthew Allen I should have mentioned as part of my response yesterday the following regarding PP of building:

-I used $800/month in my calculations but you have to (conservatively) know that you can get these numbers, or use a lower number

-the reason you might use $800/month in your underwriting instead of $675 (actuals) is because you're strategically trying to arrive at a purchase price that is attractive to the seller (competitive versus other offers) and yet still going to yield great ROI for you

-as I mentioned, you need to use a detailed underwriting tool (spreadsheet) not a BP calculator. You shouldn't be analyzing a MF deal in the same way as a SFH or a dup/tri.

And I'll warn you again on using the cap rate (read my prior post) in your price calculations. I don't know where this property is but I can almost guarantee you that a 8 unit "train wreck" property should not be bought at a 7 cap just about anywhere in the country. Focus instead on making sure that ARR/IRR/CoC meets your goals.

Check out @Brie Schmidt and her team at 2nd City RE. I work a lot with @John Warren who is part of 2nd City and the whole team is very knowledgeable and investor friendly...that is their primary focus.

@Ian Ippolito Thank you! Great write up and just saw your site with 100x the information that you just shared. I'm in!

A few pieces of information to consider:

-Agree with @Phil Morgan for sure, never trust the seller's agent or the seller for that matter...doesn't mean that there are not good ones out there, but they will have to earn your trust and you still need to verify everything

-Forget about cap rate for now. First off, an 8 unit at a 7% cap is probably not a good deal. Second, you aren't going to be able to use the NOI/Cap rate anyway, or the seller will be paying you money (see below on expenses). Third, you need to focus on cash flow and purchasing this building at a number that will allow you to have positive cash flow

-The expenses at $24K are too low. I don't know what market this building is in but you are at about $3000/unit. This is very market/building specific but I would budget closer to $4000/unit for preliminary underwriting and it could easily be higher. There are all sorts of expenses not included above, the biggest being PM and capex reserves.

-There is a lot that you don't know about deferred maintenance/capex. Do you need a new roof? HVAC? How much work on the units to make them rentable? Can you put more $ in and get $850 or higher? All of this is important information as it is going to determine how much money you need up front, what your potential ROI is and what price you need to buy this building at.

-To buy a building like this you can't buy on actuals, or again, the seller would be paying you, you have to buy on potential. HOWEVER, this requires a sound strategy, solid underwriting and experience. 

I think the best route for you is to find a more experienced partner or an experienced PM. If you can't find either of those I would walk away as this project is too risky and there is too much unknown.

BTW, if you want a "guesstimate" price, here is where I would be at with the very limited info we have.

-$800/month x 8 units x 12 months = $76,800 x .90 occupancy = $69,120

-$4500 x 8 units = $36K expenses = $33,120 NOI/9% cap = $368K

-$368K - $50K (just a guess at deferred maintenance) = $318K

-I would be offering closer to $300K, which is around $37.5K/unit (how does this compare to comps for 2 BRs in area?)

*this is very rough and a quick swag, you need to completely underwrite the deal in a spreadsheet and consider other factors including financing, exit cap rate, actual expenses (yours not what they report), etc.

Good Luck!

Hey @Steve Wilson I'm right down the street from you in Barrington. I'm investing on the south side of Chicago and also in syndication deals. I'm happy to be a resource for you and/or meet up at some point. I have a group of about 8 multifamily investors that email and meet up semi-regularly. This group is actively investing in MF, from 10 to 100+ units and also has a wealth of knowledge if you're just looking to invest passively.

Good Luck.

I love the concept and would love to be involved in the development of a project like this in the future. Some thoughts and random questions.

Construction costs are high for typical builds, I have to think that they are through the roof for a highly energy efficient build. I know prices for solar, wind, batteries, etc. have come down tremendously over the last year, what about a green construction project like this? How do you manage up front build costs versus overall benefit?

Everybody wants to "go green" until it comes to the price tag, whether that be the home price or rent. Whats the sales pitch to your customers (i.e. "in X number of years you will break even on your investment")? Who are you marketing to?

Thanks!

+1 on the appreciation to @Account Closed and other posters for really illustrating this point and making me/us analyze our underwriting assumptions even more. A lot of things that seem obvious, aren't so obvious and the little nuances that have been pointed out are incredibly helpful. On to Google to figure out the best way to add multi-faceted stress tests to my  underwriting model.

I don't necessarily look at monthly cash flow per unit, I look at the overall investment and consider CoC, IRR, amount of effort/risk with project and more. If you pinned me down on a number I would say that I'm shooting for $200 per door (after stabilization), $100 per door is not going to cut it. I don't think there is much difference between your numbers on a 50 vs. 150 unit+ building when your talking about a rule of thumb like $/door.

BTW, I wouldn't call $100/door a conservative benchmark, it is pretty aggressive/risky actually. If you underwrite at $200/door and you end up at $100/door, fine. If you underwrite at $100/door and end up at $0, not so fine. There's just not enough meat on the bone to underwrite and purchase a deal for $100/door unless you have goals/strategies that are other than cash flow.

The upsell is definitely coming. I don't know a lot about their inner workings but I don't like the old school sales tactics that are used every step of the way. I went to one of their 2 hour intro classes for the hell of it a couple of months ago and the emails and phone calls were non-stop.

I believe in the value of education and I think paying for education can be a good investment, I just don't like their style and I think they are way overpriced for what you're getting. In the end they are looking to "mentor" you for $30K+. There are better alternatives out there.