first commercial deal (moving up from 4 unit investments)

[HockeyGuy]

Hello.
I'm taking a look at my first commercial deal. The property is a 16 unit property.

After a few repeated inquiries, I've finally got the real estate agent to "put the numbers together" and send me the details. I'm a little frustrated by this guys lack of responsiveness, but I digress....

Anyway, its a 16 unit property built in the early 1960s in a first ring suburb of a not-too-well off city.
Its listing for $585,000.
Cap 7.28 (I already think thats way too low)
Annual rent - $110,000
Misc income - $1400
Gross Sched income - $111,100
Vacancy/Credit Losses - $5,555
Gross op income - $105500
total exp - $63000

Net opp inc - $42600
est mortgage - $38000
Cash return on eq - $4600

Taxes are $28600
Insu - $6100
Gas - $12000
Electric - $3000
Water - $2500
Maintenance - $5300
Trash/disposal - $1800
Snow removal - $1300
reserve - $2200

total expenses = 63000
net opp = 42600


My first reaction is that a cash return on equity of $4600 is WAY too low for this type of investment - especially since owner pays heat and water. I've already heard of a potential 33% raise in nat gas costs this upcoming winter.

I'm interested in hearing some veterans thoughts on this. SteveO, what do you think?

I know I have to go back and ask for a substantially lower cost at this point as I don't feel comfortable with that little positive cash flow and small cushion.

Heck, my 4 unit property almost gives off that much positive cash flow

 

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[Runum]

Welcome and glad you made it here. You really need to post an introduction in the correct forum before posting this here.

That being said, we don't know the area, your financial situation, your goals for the property, whether this is an value or equity play.

My point is, that it is very difficult for strangers to come in and give you reliable input on your project. Also, if you follow the advice of people that give it to you without all the facts then you won't be in business long.

So, we would like to help you. We need more information starting with a proper introduction, please.:cheers:

 

[MJ DeMarco]

No comment on the deal, just a "welcome to the board" and congrats on taking action.

 

[HockeyGuy]

Thanks. I'll post my formal introduction

 

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[HockeyGuy]

I just posted my intro. Hopefully I wrote enough to help people understand my goals and situation. I do appreciate any advice offered. Hopefully I can eventually contribute as much as I receive on these boards.

 

[SteveO]

It is very difficult to provide feedback on a location that is not familiar. I can give my opinion on some generalities though.

From a glance it appears that some of the information on income and expenses may need to be looked into a little deeper. Ask for the income/expense statements for the past couple of years. The rent loss and vacancy seems light unless this is a very tight market. The fact that the area is on the lower end will lead to more loss in itself.

The expenses are missing admin costs, management fees, and advertising. When people do this, it is possible that they are shaving other expenses as well.

It is very important for you to understand the market that you are planning to invest in. Your accurate pro forma of income and expenses will be much more valuable that the sellers information. Comps in the area are important as well.

I don't like properties that require the owner to pay for heating/cooling. I will accept master metered water but not gas and electric. The exception is for common area usage.

 

[Runum]

Perhaps I'm missing it, how much money are you having to come into the deal with? What would be the cash on cash return?

 

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[hatterasguy]

I would presume at least 30%-40% cash? Unless the owner is holding back the note? How conservative is commercial these days?

From my limited experiance in these types of property they always seem to overstate the income, and understate the expenses.

 

[HockeyGuy]

I don't like properties where the seller pays heat either, but part of my strategy was to look to buy it at a price that already had decent positive cash flow and then sub meter it.
However, with this property I agree that I think there are some expenses missing. If the current owner did not pay a mgmt co, then I certainly would and would insist that number be in the calculations.

Am I out of line to ask for a 10% cap rate here? Especially since I'm at risk of a 33% increase in nat gas costs this winter.......

Downpayment would be 20%...cash on equity is 4696 or 4.01 percent...........

 

[Runum]

I don't like properties where the seller pays heat either, but part of my strategy was to look to buy it at a price that already had decent positive cash flow and then sub meter it.
However, with this property I agree that I think there are some expenses missing. If the current owner did not pay a mgmt co, then I certainly would and would insist that number be in the calculations.

Am I out of line to ask for a 10% cap rate here? Especially since I'm at risk of a 33% increase in nat gas costs this winter.......

Downpayment would be 20%...cash on equity is 4696 or 4.01 percent...........

I do hope there is more the this story. IMHO if you are going into the deal for an equity play rather than a value play you should expect to get better than a 4% return on your money. You could get 4% from other investments with less headache. What would be your primary exit strategy?

 

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[HockeyGuy]

I do hope there is more the this story. IMHO if you are going into the deal for an equity play rather than a value play you should expect to get better than a 4% return on your money. You could get 4% from other investments with less headache. What would be your primary exit strategy?

I agree. There should be much more to this story. Thats why I had to get a second opinion on it just to make sure I'm not crazy.

I'm trying to set up an appt with the seller's broker.
I'm looking to make an offer only around a 10% cap rate here, especially since I don't expect any rapid appreciation from the property.

Its frustrating. I'm looking for value here and am having a tough time doing so.
The Buffalo area sure doesn't have a lot of multifamily buildings to choose from. Its "almost" cheaper to freaking build one from scratch.

I've searched all the major realtors sites, loopnet, etc and can't find much to choose from. This seller would have to start at about a 100k cut from the current price to even start to make it attractive, and I still wouldn't go for it.

Do you think the agent just doesnt know what he's doing and is selling it at such a high premium out of ignorance?

 

[Runum]

Good to hear that you are still digging. I think the agent doesn't really care about the numbers. He only wants to make the sale. The higher the price the more his commission.