Evaluate this 5-plex in East Tennessee

[Jered Collins]

Found a 5-Plex in East Tennessee located in a college town in a popular part of town known as the historic "Tree Streets".   The house is a two story brick traditional home.  Unit mix is 3x 1Bd 1Ba, 1x 2Bd 1Ba, and 1x efficiency 1Bd 1Ba.  List price is $200,000.  

The apartments are outdated with wood paneling walls, old appliances, old fixtures, and outdated carpet.  The bathrooms need new vanities, fixtures, some units need new showers, and paint.  I'm really deliberating on how to deal with the wood paneling.  Should I just paint it, skim-coat, or remove and replace with drywall?   What's everyone's experience with wood paneling?  The outside of the house is in fair condition.  The roof will need to be replaced in the next 3-5 years most likely.  

Market Comps in the historic area of town (.5 mile radius of subject property) range from $450-$575 for 1 Bed 1 Bath.     I think with around 4-6k invested per apartment, plus 5-10k invested on the outside (30-50K renovation) I can get around $550-575 for the 1 Beds, and around $650 for the 2 bed 1 bad.  Rehabbed monthly gross rent should be around $2,850.

My goal is to only purchase properties that yield 1.5% gross rent of the purchase + rehabbed cost of the building.  To achieve my goal of 1.5% I would need to be all in at $190,000 or less.  With all this being said, with my renovation budget of 30-50k, I am considering placing an offer at 140K.  This is a 30% discount to the list price.  Does this seem logical to offer that low given the steep discount?  

Anywho, here are my numbers for the deal.

List Price = $200,000

Est. Purchase Price = $140,000

Est. Renovation Budget = $50,000

All In Costs = $190,000

I'm exploring private money and weighing the pros and cons of going this route. I ultimately would like to refinance to a fix rate 30 year conventional note after the apartments have seasoned for 6-12 months. Will Fannie Mae loans refinance 70% LTV from a previously held private money loan?

Assuming I can refinance to a 30 year fixed loan here are my numbers.

ARV = $270,000

70% LTV = $189,000

DEBT:

Debt Constant of 4.8% loan ($189,000) = 6.3%

Monthly P&I @ 6.3% = ($11,907 / 12 = $992)

EXPENSES:

Less Vacancy & Collection @ 10% = $285

Property Taxes (Monthly) = ($1,405 / 12 = $117)

Insurance (Rough Estimate) = $1,200 / 12 = $100)

CAPEX @ 12% Gross Rent = $342

Maintenance @ 12% Gross Rent = $342

Water/Sewage = $200

Lawn Care = $125

Property Management @ 10% Gross Rent = $285

TOTAL MONTHLY EXPENSES = $1,796

DEBT + EXPENSES = $2,788

Cash Flow = $62

My goal is to cash flow $100 per a door but this market is getting tougher and tougher to find deals.  My numbers are somewhat prudent and there is a high likelihood I will cashflow more than shown.  The only reason I'm considering doing this deal (with the assumption I can get it under contract for the price mentioned above) is that I might be able to pull most if not all my equity out of this deal and find another deal to do.  I do not live local in this area so I am very reluctant to manage this property myself.  I haven't figured out how to conduct tenant walk thrus and other logistical challenges that presents itself being distantly managed.  

What are everyone's thoughts?

[Heath Ryans]

@Jered Collins I have a few thoughts

1) That specific property is on the more desirable side of the tree streets

2) If you want those rent numbers, your going to spend close to 10k per unit. Look at the finishes of the comps.

3) the building has a weird layout and the backside/entrance mates up to an industrial area

4) everything in the tree streets is very old. That's a 1920s building. therefore everything is dated unless there has been serious updates

5) I think 230k ARV would be pretty close to max. If you actually managed to get the rents your hoping for then 260k but I wouldn't put my money on it.

6) your insurance is going to be closer to 2500-3000k

7) i very highly doubt you will get a 30 yr note on this property.

8) you might as well factor replacing in the roof into your purchase price cause It will need to be done immediately

9) I think your capex allocation is super high, especially if you plan on doing the rehab correctly upfront. I would do closer to 4-5 

Not to burst your bubble or anything. But that's going to be most probable real world issues on that property. If a property sits in the tree streets, it's for a reason. Not saying you can't make a good deal out of this one, you just need to buy much lower, and budget a bigger rehab.