Evaluate this 5-plex in East Tennessee

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Evaluate this 5-plex in East Tennessee

Jered Collins
Johnson City, TN · Member since 2017 · 49 posts · 27 votes

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The apartments are outdated with wood paneling walls, old appliances, old fixtures, and outdated carpet.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?

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Heath Ryans
Investor · Kingsport, TN · Member since 2016 · 412 posts · 254 votes
7y

@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.

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  • Heath Ryans
    Investor · Kingsport, TN · Member since 2016 · 412 posts · 254 votes
    7y

    @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.

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  • Jered Collins
    OP
    Johnson City, TN · Member since 2017 · 49 posts · 27 votes
    7y

    @Heath Ryans thank you for your thought out response. It appears that I might already be late to the party. Talked to the realtor tonight and there is a pending offer that came in much higher than what I offered.  

    I agree with all your points. I am curious to point 6 about having difficulty getting a 30 year note?  Can you elaborate more on this topic?  Would I have better luck with a 10 year balloon payment on a 25 year amortized schedule? 

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  • Heath Ryans
    Investor · Kingsport, TN · Member since 2016 · 412 posts · 254 votes
    7y

    @Jered Collins no kidding. Likely someone who just has money to spend. There's a few out of state guys hitting the area right now.

    You might could get a 30yr. I havn't found anyone yet who will do 30 on commercial property, not that I have done an overwhelming amount of searching. The age of the property would likely be turn off for some lenders. You could get 20 easy. Maybe 25 if your lucky. If you found 30 then I need to know how. I just don't see the same kind of love for the smaller properties that larger ones can get.

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  • Derek Tellier
    Real Estate Agent · Sevierville TN · Member since 2018 · 305 posts · 224 votes
    7y

    @Jered Collins

    A 5-Unit is a Commercial Property to it's very difficult if not impossible to get a conventional 30 year mortgage from a bank. 
    Possibly via seller financing and certainly call every local bank around to find out, do that even before you get into a property like this to see who MIGHT be willing to do a refi and what requirements they'll have. 
    You'll likely find at best they'll give you 25% of value which will be based on NOI and Cap rate not on Comps.

    I'm not a lender so don't take my word for any of this by any means, reach out and talk to commercial lenders or small community banks and ask them. 

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  • Jered Collins
    OP
    Johnson City, TN · Member since 2017 · 49 posts · 27 votes
    7y

    @Heath Ryans Yea, I’ve noticed lots of smaller multi family properties are getting swallowed up fast lately.  I have 4-6 markets that I keep my eye on and all of them are extremely difficult right now to find deals that cash flow.  I can’t imsgine how anyone would positively cash flow on this particular deal at the price I believed they are offering at. Especially, if they are out of market buyers relying on third-party property management. Crazy market. 

    That’s good insight on the commercial loan market of the Tri-Cities. Thank you for your time. BTW, I’m always looking for partners in deals if you’re ever interested.

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  • Jered Collins
    OP
    Johnson City, TN · Member since 2017 · 49 posts · 27 votes
    7y
    Originally posted by @Derek Tellier:

    @Jered Collins

    A 5-Unit is a Commercial Property to it's very difficult if not impossible to get a conventional 30 year mortgage from a bank. 
    Possibly via seller financing and certainly call every local bank around to find out, do that even before you get into a property like this to see who MIGHT be willing to do a refi and what requirements they'll have. 
    You'll likely find at best they'll give you 25% of value which will be based on NOI and Cap rate not on Comps.

    I'm not a lender so don't take my word for any of this by any means, reach out and talk to commercial lenders or small community banks and ask them. 

    Thanks for your time Derek to respond to my post. Am I reading the 25% part of your post correct? 25% LTV based on NOI and Cap Rates or 25% equity I would bring to the table? Thanks.

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  • Heath Ryans
    Investor · Kingsport, TN · Member since 2016 · 412 posts · 254 votes
    7y

    @Jered Collins it's beyond me. Half the purchase prices I see don't make any sense. I do know that some of the big guys are from NY. They're likely just trying to get a tax break more so than needing cashflow.

    Good to know. I'll keep that in mind. Thanks.

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  • Derek Tellier
    Real Estate Agent · Sevierville TN · Member since 2018 · 305 posts · 224 votes
    7y
    Originally posted by @Jered Collins:
    Originally posted by @Derek Tellier:

    @Jered Collins

    A 5-Unit is a Commercial Property to it's very difficult if not impossible to get a conventional 30 year mortgage from a bank. 
    Possibly via seller financing and certainly call every local bank around to find out, do that even before you get into a property like this to see who MIGHT be willing to do a refi and what requirements they'll have. 
    You'll likely find at best they'll give you 25% of value which will be based on NOI and Cap rate not on Comps.

    I'm not a lender so don't take my word for any of this by any means, reach out and talk to commercial lenders or small community banks and ask them. 

    Thanks for your time Derek to respond to my post. Am I reading the 25% part of your post correct? 25% LTV based on NOI and Cap Rates or 25% equity I would bring to the table? Thanks.

    Every Lender is going to be a little different, with no background they aren't going to give you much benefit of the doubt. 
    Naturally if you can get in with private money and show you can make it perform they'll be more apt to give you a better deal but asking what they'll do is like asking what the weather will be like tomorrow in East TN. 
    Could be sunny and 70, could rain all day, could snow! 
    Nobody really knows lol 

    But seriously they're going to look at the income and performance of the property to determine value and it's unlikely they're going to loan you more than 75% of the value with no track record. 

    Again I have to say I'm no expert and not a lender so I'm just talking from what I've heard and seen. Please go out and prove me wrong and then share with us how you did it and who the lender was. If they help you and it leads to you helping them get more business you'll be in a much better position the next time. 
    Referrals go a long way! 

    1Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    Looked like a lousy deal anyway even at 140k purchase . 

    0Reply
  • Jered Collins
    OP
    Johnson City, TN · Member since 2017 · 49 posts · 27 votes
    7y
    Originally posted by @Dennis M.:

    Looked like a lousy deal anyway even at 140k purchase . 

     I agree. After sleeping on the deal I reran the numbers on rent comparables for the area and I think it would be a stretch to get $2,850 gross rents.  I’m still scratching my head on how people are putting in offers this high. 

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