Is this a good deal?

Question

I working with an old landlord to sell his property. The property would be for $65,000 and the ARV after repaired would be approximately $428,000. The building is completed gutted and estimate for repairs is approximately $180,000. It is a multi family of 8 units in a great upcoming neighborhood. With a 12% vacancy rate and $550 for rents (Rents could be easily $600 a month for the location per rent o meter) With my calculations:

Total ROI: 24.32%

Cap Rate: 14.03%

COC: 19.09%

Any thoughts appreciated...

Total ROI: 24.32%

Cap Rate: 14.03%

COC: 19.09%

Any thoughts appreciated...

Joel Owens · Answer

Let's say 8 units at 525 a month.

525 X 8 = 4,200

4,200 X 12 = 50,400 year  Gross expected income once stabilized.

Assuming separate water meters are put in and landlord pays no utility then go 50% ongoing costs ( PM, operating and expenses, vacancy ).

50,400 X .50 costs = 25,200 NOI

Exit at a 9 cap in 1 year or so ( you have said this is the market cap ).

I am getting a 275,000 resale price when exiting.

So 65,000 when purchasing plus

You say 180,000 which is 22,500 a door. How much sq ft is each of these units?? We can do full gut stud reno's for about 800 sq ft to 1,000 for 13,000 a door here in Georgia. 22,500 a unit seems really high unless these are really big spaces.

If you take 180,000 and 65,000 you are at 245,000. After resale costs when exiting you have no forced appreciation just the cash flow. That's way too much money to dump in for the expected return. Now if costs per unit go down to 13,000 at 8 units = 104,000 rehab. That is a 76,000 forced appreciation profit margin for the work and time invested. As you can see getting rent rate numbers, rehab work, and exit values is critical when taking on these types of projects. When rehabbing apartments most use below market rents for the first year to lure away the good tenants from other properties. You might find a buyer who owns a construction company and can do the reno per door for much lower because they can spread out labor and material costs among other jobs they are doing.

How much land does this 8 unit sit on?? The property might be better to be demolished and build a higher density on the existing land.

Arguments you will get from a seller is once everything is new costs will not run 50% total. That may be true the first few years but then you will also have more repairs accelerating in 5 to 10 years and later so it balances to the 50%. If landlord pays utility 60%.

Hope it helps.

Simon Campbell · Answer

I would have to agree with @Shaun Reilly on the part about your expenses. Most investors look at profitability by using the 50% rule. I would not personally buy a property that cannot cash flow after using the 50% rule, even if the actual expenses are less.

Here is my take on what your expenses will most likely be in reality:

Gross Rental Income: $50,688

Vacancy Rate: 12% or $6,083

Property Insurance: 5% or $2,523

Property Taxes: 10% or $5,069

Repairs/Maintenance: 10% or $5,069 (after initial repairs/remodeling costs)

Capital Reserves: 5% or $2,534

Total Expenses = 44%

Estimated NOI $28,385

Simon Campbell · Answer

I am totally unclear about how you came up with your the return on your investment.

ROI is calculated by dividing the NET profit into the monies invested- including your financing. Your GROSS profit is ($600 x 8) x 12 months or $57,600. Using the 50% rule (i.e. 50% of gross income goes to all expenses including vacancy but not any mortgages), then your NET income is $28,800. But this does not include any loan repayment. You need to take out the annual payment on any mortgages and then divide THAT number (your actual cash in hand return) into the total investment price of $245,000. You will be looking at an actual ROI of around 6%.

The Cap Rate is the return on your investment as if you paid cash. This is calculted by dividing the NET income into the total investment price or $28,800/($65k + $180k). Based on this, your cap rate would be 11.8%.

Cash on Cash is determined by dividing the Pre-Tax Cash Flow (net income less mortgage payments) into the total cash invested. Since you say if you are paying cash, getting a loan and/or what were the terms, there is no way to verify if this calculation is correct.

But, that being said. If purchase price, remodeling costs and rental rates are accurate and you applied the 50% rule, you would have around $2,400 of income left over to pay any mortgages and provide cash in your pocket. Looks like a good deal...

William T. · Answer

@Darrell Shepherd Thanks for your interest, I just called.

Darrell Shepherd · Answer

I may want this thing if you are going to wholesale it.  My dad lives up there and we do stuff together and I'm happy to send him by to give you a second opinion on the renovation.

Sounds like a pretty good deal on the surface.  Never know until you get into it, though. I'm actually surprised at what things are going for up there for rentals.  My play would be buy, fix, lease up, then sell.  Looks like a sweet deal for that if your numbers are right.

Give me a ring when you get a chance: 404-886-9318.

William T. · Answer

After all this time...  I finally going to the table to get this multi-family under contract.

William T. · Answer

@Jerry W.  My mentor is actually an experienced rehabber in the St. Louis market.  The building is completely gutted and yes there should be a holding period.  My mentor has initially estimated the cost at $110K however I think that is low...  Before I would even think about wholesaling this, I would have to get the price lower.  If they won't then I won't present this because it is simply not a deal.  No deal to investor = no representation from me

@Joel Owens The square footage of the property is 7020 and it is a pretty big building.  I would assume the rehabber would hold on to the building which it is in a great neighbor and school district.  It is also between two major Universities in St. Louis, my fellow brothers have advised me to drive the price down to the lowest amount.  I am working on this now to wrap this up.  I really appreciate everyone who has contributed to this thread to help me with this possible deal.

Jerry W. · Answer

@William T. , are there currently tenants in it or is it vacant?  Would the property have to be empty to gut it?  Can you keep some tenants while you fix up some apartments?  What kind of time frame for the gut and refurbish?  Just curious if the possible holding time costs need to be calculated.

William T. · Answer

@Simon Campbell According to the calculations you provided, it appears to meet the 50% rule.  From one of the other wholesalers calculations, I should also be correct in the price, however, the ARV is wrong after speak with a RE agent.  The ARV is $395K not the $425 originally stated...  I am still in the process on negotiating the price down a little bit further.  I should have this under contract by the end of the week.

@Shaun Reilly The cap rate is 9% for the Maplewood, MO area...  This is a whole different beast and I am learning a lot with the info provided by the thread.  I am still being conservative on the rents with $550.  According to Rent O Meter, the rent can go up to $625 (Luxary apartments).

Is this a good deal?

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