Analyse this Multi family Deal

[imirza]

66 unit multi family .
65 1 bedrooms 1 2 bedroom.
Class C building located in an area that was once dangerous(gangs, drugs, murders) but is now being turned around. So its still a not so good blue collar area but its no where as bad as it was a few years back. In the next 5 yrs there will be major improvements to this area ( provided we don't go into a depression and face complete economic collapse and some other unthinkable catastrophe)

1 bedrooms rent for $575
2 bedroom rents for $675

Current Financials

Gross Rent $353,360 ( 18 units vacant)
Expenses $ 220,000
NOI $133,360

Current rents are on the high side. In order to stabilize property they will probably need to be dropped to $525 for the 1 bedrooms and $600 for the 2. Utilities are inclusive hence the high expenses. Property does not require much work other than some minor cosmetic items that will probably be no more than $30k.

I will be putting 10-15% down. Financing will be a 5 yr arm at around 6.75% amortized over 30 yrs.

How much should I pay for this property ? Remember its not an all cash offer and the bank that currently holds the note is willing to finance me with only 10-15% down.


EDIT: Important thing to mention. The bank is owed $1.6 mil on this property. There is only so much of a loss they are willing to take.

 

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[GLC65]

66 unit multi family .
65 1 bedrooms 1 2 bedroom.
Class C building located in an area that was once dangerous(gangs, drugs, murders) but is now being turned around. So its still a not so good blue collar area but its no where as bad as it was a few years back. In the next 5 yrs there will be major improvements to this area ( provided we don't go into a depression and face complete economic collapse and some other unthinkable catastrophe)

1 bedrooms rent for $575
2 bedroom rents for $675

Current Financials

Gross Rent $353,360 ( 18 units vacant)
Expenses $ 220,000
NOI $133,360

Current rents are on the high side. In order to stabilize property they will probably need to be dropped to $525 for the 1 bedrooms and $600 for the 2. Utilities are inclusive hence the high expenses. Property does not require much work other than some minor cosmetic items that will probably be no more than $30k.

I will be putting 10-15% down. Financing will be a 5 yr arm at around 6.75% amortized over 30 yrs.

How much should I pay for this property ? Remember its not an all cash offer and the bank that currently holds the note is willing to finance me with only 10-15% down.

Being mainly one bedrooms is a negative but sure beats being studios. Are all units rent ready or do you need to pump money into it? Why is the reason the property went into foreclosure? What type of tenants are occupying the units now? What is the square footage of the one and two bedrooms? Why are the rents over market? Is the city where this property is located landlocked? Which industry are major employers of your type or class of tenants? Who are your competitors and what type of amenities do they have and what do they charge? How old and what conditions are the mechanicals (plumbing, electric, and heating) and how are the conditions of the roof, windows, gutters, etc.? Forget what the area will be in the future. If it happens, GREAT. Don`t count on it. Expect the worst case scenario and pray for the best. What is your worst case scenario? Say you were to evict everyone and start from scratch. Where are you going to get the funds or is the bank willing to give you a one time forebearance? What does your insurance company think? Why is the area not so bad and it was bad before? Check crime statistics with the local police district. Talk to the area`s alderman and area`s apartment and homeowner`s. What makes you think you can turn this property around? What were the historical rental and revenue history? Forget what the rent roll is, what is their month collection and eviction average? What type of criteria did previous management use?

 

[imirza]

• Vacant units are rent ready.
• Property Owner lives out of state and over payed for the property back during the boom in 2006. Owns other multi family properties and is losing money on everything.
• Tenants are a mix of blue collar type. Construction, mechanic, handyman, cleaner, hooker etc
• One bedrooms are 500 sq ft. 2s are 600 sq. ft.
• The city is Phoenix. It is not landlocked not that I think.
• Industries they are employed in - Still trying to determine. Blue collar professions.
• A new chiller and boiler were recently installed <6 mos. We haven't done full inspection but the only issue is plumbing. Roof, windows structure etc look to be very solid. Once inspection is done we will know for sure.
• If we were to evict everyone and start from scratch it would be manageable. We have enough funds to go 6 months 100% vacant. It might not be such a bad idea :eusa_clap:
• Worse case scenario, everything goes to hell and we hand the keys to the bank. We lose $200k. Its only money.
• The area is not so bad because, ASU opened a campus a few miles away last year and the city has become determined to clean up the area. Hence they shut down motels catering to drug dealers and prostitutes and increased police presence. A lot of undesirable elements have left. We know a motel owner down the street and he has confirmed this. Its also very close to downtown and downtown has seen a lot of new projects and revitilization. Lots of money being spent here.
• We believe we can turn this property around because #1 rents are too high and if we lower them it will decrease vacancy. #2 we are local owners vs a hands off out of state owner #3 we will replace current makeshift manager with a professional one .
• This property had high occupancy 90% + until the last year or so. The economy is in the gutter and thus rents became too high for a lot of people. Owner does not take care of the place.
• I am not sure what criteteria you are referring to. I don't know what criteria previous management used.

 

[andviv]

Given the current situation, and that you are looking at 1 bedrooms, I'd go with a 12-15% cap rate and see what the bank says.

 

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[RealOG]

I think you might be missing some key elements for picking a price: comparables, builging age, seperately metered, market vacancy, etc.

I would find out what market cap rates are currently in the area for other c-class sales (assuming this is a c-class). Use that to figure out the market value of the building, add in your expectations for the future of the market (up or down, likely down), and then offer a price that reflects the risk/reward you require.

You may want to consider posting the expenses here so the experts can weigh in on what to expect.

Last comment would be on the numbers you posted. Are those verifiable actuals or proformas?

 

[imirza]

I think you might be missing some key elements for picking a price: comparables, builging age, seperately metered, market vacancy, etc.

I would find out what market cap rates are currently in the area for other c-class sales (assuming this is a c-class). Use that to figure out the market value of the building, add in your expectations for the future of the market (up or down, likely down), and then offer a price that reflects the risk/reward you require.

You may want to consider posting the expenses here so the experts can weigh in on what to expect.

Last comment would be on the numbers you posted. Are those verifiable actuals or proformas?

Property was built in the early 60s. Market vacancy is in the 20% range based on legwork I have done. CAP rates for similar properties appear to be in the 9% range.
A property across the street 22 units 12 studios and 10 1 bedrooms sold for $286k 2 weeks back. It was a fixer upper and completely vacant. Needed $200k in fix up. We had taken a look at that too. The investor that bought it is has vast real estate holdings. We have had dealings with him in the past. He knows what he is doing.


These numbers are based on what we see off the P + L statements provided by the borrowers CPA. I am using the numbers for 2008.

Expenses are

Real Estate Taxes $11,100
Insurance $12,381
Utilities $93,550 ( master metered)
Repairs & Maintenance $32,632
Advertising + Admin $10,558
On-Site payroll + Mgt. $44,915
Reserves + Replacements $16,500


Andviv - 12-15% cap would be $887K to 1.1 mil. I think even an offer of $1.1 mil would be a little too low. I need the bank to take us seriously. We make that offer and it will be 'next please'. Investors are looking at stuff in this area. The market is bad but smart buyers are coming in evidenced by the transaction I mentioned above.

 

[GLC65]

$1.65 million would be my price.

 

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[kidgas]

Personally, I like JScott's evaluation and agree with his assessment. I would consider offering 1.25-1.3 million if you think 1.1 is too low.

 

[imirza]

The property is listed for $1.8 mil. I know the bank will accept $1.6 mil. I am thinking of offering $1.2 mil. I might be willing to go up to $1.4 mil , maybe even $1.5 mil depending on how confident I am on our ability to turn it around.

JScott- A vacant fixer upper building 22 units - 10 1's 12 studios sold for $286k 2 weeks back. Needed $200k in work. So essentially it sold for around $22k per unit. I figure if I can get this building for under $22k per unit ($1,452,000) its a very good deal. $900k is not a realistic offer IMO. That's under $14k per unit. At that price there would be bidding wars. Replacement cost for this building would be at least $30k per unit probably even $40k. The numbers look bad because that area being blue collar has been hit badly with this recession. Things will turn around and vacancy will drop to under 10%. I want to buy this property where at the very least I am breaking even starting on day one. Than I can get to work and start turning things around and increase gross income and cash flow. I believe in a stable market, this property would sell for at least $2 mil.

 

[hatterasguy]

I'd offer them $1.2. The market sucks, beat them up a bit. Now is the time to get a deal.

 

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[AroundTheWorld]

If that's the case, someone paying $2M would be getting just above a 6% cap rate!

I didn't ever see 2M. Did I miss it?

 

[imirza]

JScott - the numbers will improve. If we drop rents drastically to $525 a unit and get vacancy down to 10% NOI will be around $152k. At a 9% cap that's $1,688,889. When the economy improves and we can charge $575 a unit and keep vacancy under 10% NOI will be 185k . At a 9% cap thats over $2 mil.

As for stablized performance, I was giving an example based on todays market. The economy is bad and I don't expect to be at 100% occupancy. Even at 80% occupancy and $525 for the 1s and 600 for the 2, NOI will be $113k. At a 9% cap that's $1.26 mil.

Where are you getting the $100k in work ? I said it may need $30k in cosmetic stuff.

 

[AroundTheWorld]

JScott - the numbers will improve. If we drop rents drastically to $525 a unit and get vacancy down to 10% NOI will be around $152k. At a 9% cap that's $1,688,889. When the economy improves and we can charge $575 a unit and keep vacancy under 10% NOI will be 185k . At a 9% cap thats over $2 mil.

As for stablized performance, I was giving an example based on todays market. The economy is bad and I don't expect to be at 100% occupancy. Even at 80% occupancy and $525 for the 1s and 600 for the 2, NOI will be $113k. At a 9% cap that's $1.26 mil.

Where are you getting the $100k in work ? I said it may need $30k in cosmetic stuff.

Classic example of creating wealth by increasing income and using the leverage of the cap rate!

 

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[SteveO]

Are you factoring in rent loss? This market is seeing a lot of problems with collections and a lot of money in concessions. If you currently have 18% vacancy, you might want to figure another 20% in other losses. Even at 10% vacancy in this market, you need to figure another 10% in losses. People find it very easy to move in on a $99 special and then move down the road after a couple of months of not paying.

 

[imirza]

Are you factoring in rent loss? This market is seeing a lot of problems with collections and a lot of money in concessions. If you currently have 18% vacancy, you might want to figure another 20% in other losses. Even at 10% vacancy in this market, you need to figure another 10% in losses. People find it very easy to move in on a $99 special and then move down the road after a couple of months of not paying.

Well based on current financial's, we are looking at 28% vacancy and that includes rent loss etc. Despite complete mismanagement, the revenues were still $353k last yr. I figure we can't do worse than the current owner.

I didn't mention earlier the property gets $9k/yr other income - rental applications and laundry.

 

[GLC65]

With future market rents at $525, expenses at just over $200K, and average local vacancy at 20%, NOI is about $130K...

Based on my numbers, $1.65M would be like buying at a 7% cap rate...

What's your thinking here?

The figure I gave is just a vague figure without seeing the property and not bottom fishing. Certain points the potential buyer made like the Univesity of Arizona being close by and the blue collar work area as well as the vacants being rent ready seemed that $1.65 Million is the maximum price I would purchase without offending the seller. If you can get it for $800K, more power to you.

 

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[biophase]

I just read the first post and scrolled all the way down to throw in my price guess. Then I'll read the rest after.

Based upon the first post, I put the price around $1.0M.

I am not sure whether the bank's willingness to allow you to put 10-15% down instead of 20% changes the price that I'm willing to pay.

 

[AroundTheWorld]

I figure we can't do worse than the current owner.

Maybe. Maybe Not. Also have to factor in what will be going on in that local economy to impact rents and vacancies.

 

[andviv]

How long has the property been listed?

Are they getting offers?

For some reason dropping the rents that much seems counter intuitive to me. I would be looking harder at the expenses first. Maybe RUBS to mitigate the impact of master utilities?

not too much more to offer to this thread... just want it to say... I LOVE IT!!!!!!

 

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[SteveO]

Advertise, sell, and take care of the residents. Get the bad ones out, reward the good ones with treats and prizes. Keep the front door open, the back door closed and the side door for dragging out the deadbeats.

 

[imirza]

Andviv - The property has been on the market just over a month.

For now it appears we are the only ones preparing to put in an offer. But there has been interest from other parties though no formal offers.

18 units are vacant. Its pretty obvious that rents are too high based on my research. If we reduce rents to fill up those vacant units, I firmly believe we can get occupancy up to 85 even 90%. I wouldn't look at cutting costs until I fill those units up.

Bio - The lower down payment you put, the higher the risk to the bank. They like seeing you with more skin in the game. If you are willing to come with a 100% cash offer 3 day close even better. In the multi family acquisition game, the question is, do you want the best price or the best terms. The best price may not come with the best terms i.e more money down and lower interest and the best terms may not come with the best price - i.e 100% financing with higher rate and acquisition cost. You want to balance the terms with the price. Say the bank is willing to offer 100% financing. In that case I may even buy this property for north of $1.5 mil.

 

[hatterasguy]

Know anyone with some cash sitting around? If you made them say a $1.2m offer, cash close right now...you would get a far better ROI.

Borrow $1m @ 10% for 12 months, use your cash to make up the difference, and refi out after you close.

Just an idea.

 

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