All Forum Posts by: Ed Matson

Not to be a wt blanket, but there's a reason this building is priced at 1/3rd of its "value". I would not purchase a 100 year old small multi with all of these issues when I could only expect a 13% ROI. 100 year old buildings that have been updated and don't have mold are very expensive to maintain. You need all new electrical, some new plumbing, some mold remediation. And that's only what your inspection revealed. Once you get started with repairs expect some surprises. I would want a substantially higher ROI to take on this work and risk. If you haven't rehabbed a similar building before with a similar scope of work, maybe you should pass.

@Mike Kehoe - 8% per year.

@Alifiya Patrawala - We have had good experience with our condo rentals. Yes, the HOA costs are undesirable, but if the association is well managed, I need not worry about exterior paint, roofs, driveways, trees, etc. In my area of CT it is very hard to make the numbers work on SFH, a bit easier on condos. Of course, condo prices can be far more volatile than SFH. We own several in one complex where our acquisition costs have ranged from 75-90k/unit. in 2006 these same units were selling for 135-145k. It also seems that condos are easier to rent than SFH, although in a SFH you can get a better quality tenant. We make sure our condos are in excellent shape and updated before renting so we can get top rents and good tenants. It is true that a six unit can produce better numbers, but it will also be a lot more work as it is too small to support professional management. We self manage the condos and its not a lot of work. Good luck.

By the way, Fannie Mae has a low balance multi family loan with a 15 year term.  Find a good mortgage broker and see if you and your property are eligible.  The best deal I know of.  15 year term/30 year amm.

Assuming the income and expense numbers are correct (Some figures are clearly estimated as per cent of income, so go get the real actuals), you need to know the CAP rate for this geographic market and this class of property. If the NOI is really $24K and the CAP is 6%, then the property could be worth about $400K. But if its a lower quality property or in a lower quality area you will have a higher CAP rate. At an 8 CAP this property is worth only $300K. Also, does it have a substantial amount of CapEx required in the near term? Lastly, regardless of prevailing CAP rate, what return on your capital do you need? Will a 6 CAP meet your needs even if its appropriate for the market? Just because a property is fairly valued doesn't mean its a good deal for me. I am later in my career and value cash flow over potential long term appreciation or mortgage pay down, so if I can't reasonably expect a property to perform at an 8 CAP, I'm not interested. If i were 40, I would probably think differently.

For funding flips with private lenders, I think the simplest and a very equitable structure is to simply do it with debt. Since your partner is experienced, going with private money may well be an option vs. hard money loans. Typically a private lender will be looking for a return of about 8% and he will want to be in first position. After several loans from a private lender, you all may want to expand the relationship by making him an equity partner. That structure is much more complicated.  How much should the equity partner get?  What is their proportionate contribution to the success of the project? 

When selling, below the line.  When buying, above the line :)

My partner and I have actually had better returns on our condos than from our 100 year old 3 family in CT. The numbers don't work on most condos (just like SFH's in CT), but they do on some. Selecting the association is just as important as the unit. Look at their reserves, unpaid assessments, and for signs of deferred maintenance on major items (roof, parking lot, siding, etc.) I also like the fact that the association takes care of exterior maintenance and those costs are lower pro rata than if I contracted myself fro a stand alone. Condo prices can be more volatile than other types of RE, and prices have gone up substantially in the past two years, but it is still possible.

@Michael Gibek - You are correct that the two options you lay out are fairly close. But paying off your variable mortgage reduces risk, and mortgage rates will most likely rise in time. If I were in your shoes I would seriously consider refi to affixed mortgage and investing the $115K in something more interesting than Tbills/30 year Bonds.  Even if you just put it into something like the Fundrise or Realty Mogul REITS, you could reasonably expect 7-8% taxable income. Never mind an active RE investment.

@Tyson Compton - First, a disclaimer -my comments are intended to be helpful not critical. I think it is of the utmost importance to be fully comfortable with MF valuations before starting an 87 unit acquisition. Even at $50K/door, you are talking about a $4.35 MM purchase. I would educate myself the best I could or partner with a trusted, experienced investor first. Too big to get wrong. I agree with Seth and Todd's comments, but would also add that factoring in any immediately needed CapEx should go into your equation. Best of luck.