Multifamily Deal - The Numbers

[Steeze]

Asking - $590,000
14 Units all 1br/1ba
C-Class
Built in 1880's
Fully Occupied - Section 8
Last Sold in 2015 for around $275k

Building is in good condition for age with updated fire, electrical, plumbing, heating systems.
90%+ of the buildings in this area are from this period.
Best friend's father in-law is a highly rated builder in the area and has renovated/maintained this building over the last few years. His opinion is that it is a no-brainer, and that if it weren't for the section 8 program he would buy it him self. He doesn't believe in accepting money from the government (his words).
Cap Ex in those 5 years were around $80k renovating 6 units and installing a new fire escape.

renovated units (6 @ $550-$650)
non-renovated units (8 @ $450-$525)
Average rent is $525
Total income is $7350/mo ($88,200)/yr
(some additional with laundry - couldn't get a straight answer)

Average rent in the area for a 1br/1ba is $600-$750
Section 8 limit for the area is $900 for a 1br/1ba

Yearly Expenses
Taxes - $5822 / yr
Insurance - $2360 (est.)
Maint. - $8820 (est.)
Cap Ex. - $7961 (est.)
Electric - $300
Sewer / Water - $6350
Lawn & Snow - $2600
Pest Control - $400
Trash - $4200 (est.)
Vacancy - 10% - $12,600 (est.)
Management - 10% - $12,600(est.)

Total Expenses = $43,712 (49.56%)

Offer $500,000 (too high? Offensively Low?)
Rehab $30,000
Down Payment & Rehab = Heloc $205k @ 2.5% ARM
Mortgage = 325,000 @ 4.5% 30/yr Fixed

Financing Costs = $25,000 / yr

Cash flow = $1600 / mo
Cap Rate = 8.39%
COC = 9.47%

With all rents increased to $650 (additional $60k rehab)
Cap Rate = 10.24%
COC = 13.32%

Would take me about 9 years to pay back the HELOC @ current rents - but I would do it in 4-5 years with additional payments.

Very few comparable sales in the area, not many building over 4 units, but a ton of 2-4 unit properties. Generally though $50k/door is a fair price in this area with updated duplexes going for around $75k/door.

Population / jobs in area are stable but not increasing, median income in area is around $40,000, age is above average for state.

Would be first investment property. I've been looking at 2-4 family units in this area because I have a good network there, my family is close, and it is a 3 hr drive from my home in NYC. Have access to another $90k in cash/brokerage/credit as a reserve.

Other thoughts are picking up a turn-key 2-family "cash" around $150k with rents around $800-$850/mo ea.

OK - tear it apart. I know now is not a great time to buy multifamily - but I would enjoy your thoughts.

[Papa bear]

As a first rental? That’s very aggressive. Dealing with 14 units would be a HUGE pain in the ass.  Like HUGE.

Given that you have to pay utilities, this is overpriced right now.  Your cash on cash on something like this should be closer to 20% + with the section 8, class C, multi unit stuff. To get there, I would bet your offer may be in the low 400’s or even less.

You also have that you will get a 4.5% fixed rate over 30 year loan? Where are you getting that?  This is commercial property and I don’t know any commercial lenders that will do a 30yr fixed rate. 


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[Steeze]

Thanks @Papa bear  for the response - I haven’t looked at financing beyond looking around on google. I’m just closing the HELOC now and starting to look around. Seemed like 10,15,30 years was typical?  What do you usually see on commercial loans, only 10-15 years max?

To hit your numbers it would be mid to low  300’s with 35% down and with current rents.

[Archipelago]

Thanks @Papa bear  for the response - I haven’t looked at financing beyond looking around on google. I’m just closing the HELOC now and starting to look around. Seemed like 10,15,30 years was typical?  What do you usually see on commercial loans, only 10-15 years max?

To hit your numbers it would be mid to low  300’s with 35% down and with current rents.

Standard commercial loans are 20 years, 30% down (25% perhaps if you have excellent credit).

[Archipelago]

Do you have management fees built in somewhere? I didn't see any.

[Steeze]

Do you have management fees built in somewhere? I didn't see any.

I had 10% in the total expenses but not in the list above, edited to add.
Also had $500 for accounting/legal/permits

At 30% down 20years you would need to pick it up around 350k to hit 20% CoC

[Archipelago]

Do you have management fees built in somewhere? I didn't see any.

I had 10% in the total expenses but not in the list above, edited to add.
Also had $500 for accounting/legal/permits

At 30% down 20years you would need to pick it up around 350k to hit 20% CoC

Correct. This is not the right deal for you. You can do better.

[J Boogie]

Best friend's father in-law is a highly rated builder in the area and has renovated/maintained this building over the last few years. His opinion is that it is a no-brainer, and that if it weren't for the section 8 program he would buy it him self. He doesn't believe in accepting money from the government (his words).

Occasionally you find people who invest in real estate over stock market investing are not big numbers people and are more gut feeling kind of people.

I agree with the others that managing 14 tenants is not going to be fun. It's basically a part time job and not a very fun one.

[redbirdfan]

The duplex for "cash" looks good.  You could buy it with the HELOC and get a better feel for how much you enjoy being a landlord before scaling up.  14 doors and Section 8 and 3 hours away is doable, but you're significantly upping your degree of difficulty and limiting potential exit strategies. 

[Steeze]

So - I am going to look at a new deal this weekend:

4 Units
Class C+ or B- [nicely renovated / turnkey, but in a lower income area]
Built in 1890
(3) 2b/1ba @ $875/mo
(1) 1b/1ba @ $775/mo
Total Income = $3375 / mo ($40500/yr)

These rents are market rate without much room for improvement

1 of the 2 br units is vacant
1 of the 2 br units is occupied by party animals with small kids :(
All units were fully renovated in 2016
Finishes are laminate floors / granite counters / cheap appliances / new fixtures
Gas/Hot water/electric separated - tenant pays
New roof, boilers, water heaters, updated electric, plumbing, etc.
Electric was done cheap - flat metal conduit on outside of walls, but meets code.
Lead-free certificates for all units

Long term cap ex budget = $556 / mo. ($6676 / yr)
Short term ex. budget = $1140 / mo. ($13675 / yr)
Total Expense = $1696 / mo. ($20352 / yr) (50.25%)

Short term expenses
Taxes $4728
Insurance $1200
Property Management $4050 (10%)
Maintenance / Repair $2025 (5%)
Electricity (common areas) $400
Sewer / Water $3168 <-- not sure if this can be sub-metered
Lawn / Snow $2600
Trash $1032
Vacancy $4050 (10%)
Misc. $400

Asking $240000
Would buy with HELOC, then refinance
Assume financing @ 4.5% 20 years 25% down
Cap Rate = 8.4%
Cash on Cash = 10.5%

Highest and best offer would be $210k w/ inspection contingency
Cap Rate = 9.6%
Cash on Cash = 15.3%

Comps are all over the place - nothing fully renovated has sold in the last 24 months or is on market.
Similar size buildings in area sold for between $40,000 and $210,000 with average around $150,000 - but the average would need a full renovation.

I would probably split the management fee - paying myself to screen tenants / sign leases / manage payments. Then pay a local guy to complete maintenance, repairs, lawn and snow, and take tenant calls. I have a local cleaning company for turnovers.

I would also assume slow/no appreciation beyond inflation - area is stagnate at this price point.

Opinions ?

[Papa bear]

I’d look at it.  Obviously we don’t know the area and that is probably the biggest consideration. The numbers seem fair, but I would do your due diligence on the remodel; make sure the remodel wasn’t just lipstick.  Make sure you are fair with your assumptions with vacancies and repairs with turnover. Party people can do some major damage.

So solid numbers.  But:

1) know the area
2) know the remodel
3) make sure your assumptions are fair


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