Rental Property Investor · IL · Member since 2019 · 285 posts · 137 votes
Experienced BP investors,
I am in the process of potentially purchasing a 30 unit multifamily apartment complex. It would be greatly appreciated if someone could reach out to help me breakdown this deal. I would just like to get a 2nd or 3rd eye on it. Different opinions and feedback always help. Please let me know and I will happily provide all information! Thanks!
Investor · Suwanee, GA · Member since 2020 · 182 posts · 151 votes
4y
1.2M divided by 30 units = 40k a unit in cost
226,000 rent yr divided by 12 months divided by 30 units = 625 avg monthly rent
Those are good numbers. How many condos or houses would you want to buy at 40k if they rent at 625? This is way over the 1% rule.
I have a similar portfolio. They tenants are paying down about 2k per month due to amortization. I also get cash flow. I also get a ton of tax benefits. I also get to claim depreciation. In short, If you don't get much appreciation then this is still a winner. In 20+ years of investing in real estate, I have not bought any properties that didn't appreciate.
Seems like age of building and renovations is a risk and concern to you. Consider contacting a property management company that manages something similar in the area to get maintenance expectations.
Look to see if any permitted work has been done. Pull the permits and contact the company that did the work. They can give you insight to what you are getting into.
Consider contacting some GC in the area to consider process, expenses, and their experience maintaining these type of properties.
Ask a DSCR lender if they will give a line of credit for renovations. They could give you a 100k LOC and still have debt service coverage greater than 1.25 which is what many want.
Feel free to reach out or drop me a line if you would like tips on how to maximize your due diligence for this project. I wish you much success.
Thank you guys for the help. The details on the deal are as follows:
30 units.
Purchase price- 1.2 million
Location- Small town in Illinois, population 15,000. Great community, great school system. Not a ton of job growth, just your standard bedroom community. It's about 25 minutes outside of St. Louis.
The 30 units consists of 2 buildings. 18 units in 1 building, 12 units in the other.
17- 1 BDS 1 BTH/ 500-700 SQ FT
12- 2 BDS 1 BTH/ 1000 SQ FT
1- BDS 2 BTH/ 2000 SQ FT
These buildings are OLD. They were built back in the 1950's, but very structurally sound (most things were built better back then anyway IMO). With that being said, it does slow me down a bit on the purchase. Not sure if purchasing something that old is a wise decision?
- Community Laundry is located on the premise
- 6 storage units also comes with the purchase
Numbers (yearly)
Rent Roll- 226,000
Raised Expenses-
Taxes- 28k
Insurance- 12K
Utilities- 23K
Water- 10K
Trash- 3K
Management- 15K
Repairs/Maintenance (2020)- 15K
Estimated Mort Payment- 66K
By my calculations, this deal cash flows very well. What I question is will it appreciate or not with it being so old. So that is what I am down to, do I purchase for cash flow or appreciation?
There are value add opportunities for the property, to name a few. New asphalt for parking lot, landscaping, exterior paint of the brick, etc.
Any feedback would be much appreciated! If there are any questions at all, please feel free to ask! Thanks.
Rental Property Investor · St. Louis, MO · Member since 2018 · 26 posts · 17 votes
4y
Stephen,
First off, sounds like you are in my neck of the woods as I live in Troy IL. We should connect sometime.
When it comes to appreciation I think you have to consider a few things. First, if it’s in Staunton IL for example, I don’t think there is much upside on appreciation. If it’s in Edwardsville or Glen Carbon then there is certainly opportunity. Next I’d consider natural appreciation vs forced appreciation. Sounds like you have a plan for some renovation but what about rents? Are they at market or is there room to increase? Same with expenses, can you lower those?
Feel free to sync with me and discuss further. Would love to make the local connection.
Griffith, IN · Member since 2019 · 114 posts · 56 votes
4y
Hi Stephen,
I ran the numbers you presented. But I have a couple of questions. Why is the utility cost so high? You're almost at $2k a month. Do tenants pay for their own utilities? Is the building electric heat? If not, how many furnaces are there? Does your maintenance costs cover lawn mowing and snow removal?
I added a 5% vacancy cost of $942 per month. Vacancy will be an expense. Without any rehab costs, I came up with a 3.56% cash on cash return. That's extremely low. Some people use cap rate but it basically all comes out in the wash. So based on the numbers you gave, this is not a good deal. If you add rehab costs of $50k, it drops your return down to 3.42%. So IMHO, unless I put in the wrong numbers, I'd be careful with purchasing this property. I hope this helps.
Rental Property Investor · Orlando, FL · Member since 2018 · 301 posts · 354 votes
4y
@Stephen Jones what is the opportunity to do RUBs (bill back) the utilities, water, and garbage to the tenants? That would really help your CoC return and NOI which in turn with get you some appreciation of asset value.
@Stephen Jones I don't see any estimates for management or lawn care. I also think maintenance on a building like that is very low - equivalent to $500/per unit per year or $42/month per unit per month. If you add 8% for management and $2,400 for lawn care, you get an NOI Of like $109k making this a 9 cap.
You want to know about the mechanicals and how worn they are. Hope this helps.
Investor · Suwanee, GA · Member since 2020 · 182 posts · 151 votes
4y
1.2M divided by 30 units = 40k a unit in cost
226,000 rent yr divided by 12 months divided by 30 units = 625 avg monthly rent
Those are good numbers. How many condos or houses would you want to buy at 40k if they rent at 625? This is way over the 1% rule.
I have a similar portfolio. They tenants are paying down about 2k per month due to amortization. I also get cash flow. I also get a ton of tax benefits. I also get to claim depreciation. In short, If you don't get much appreciation then this is still a winner. In 20+ years of investing in real estate, I have not bought any properties that didn't appreciate.
Seems like age of building and renovations is a risk and concern to you. Consider contacting a property management company that manages something similar in the area to get maintenance expectations.
Look to see if any permitted work has been done. Pull the permits and contact the company that did the work. They can give you insight to what you are getting into.
Consider contacting some GC in the area to consider process, expenses, and their experience maintaining these type of properties.
Ask a DSCR lender if they will give a line of credit for renovations. They could give you a 100k LOC and still have debt service coverage greater than 1.25 which is what many want.
Feel free to reach out or drop me a line if you would like tips on how to maximize your due diligence for this project. I wish you much success.
Rental Property Investor · Rochester, MN · Member since 2017 · 224 posts · 323 votes
4y
@Stephen Jones
Priced at 5.3x gross income, this is a good deal. That being said, with a value add deal like this you are going to have to put in some sweat to unlock the value. Get those average rents up! For a town of 15,000 people, I don’t see why you cant get that average to $750 or $800 a month.
Try to get as much of the utilities out of your name. Plan on spending all your cash flow on renovations for at least a year or more.
@Kelly Iannone- I thought about doing RUBs. I am a little unfamiliar with the RUBs process and how it works. I really need to educate myself on this before I try and implement it. Any advice on the process and how it works?
Jonathan- Thanks a lot for the insight man. Great stuff!
I have a management expense in those expenses. There is no lawn on the property, but the snow removal expense is factored into the management fee. Thank you for the feedback.
Rental Property Investor · Orlando, FL · Member since 2018 · 301 posts · 354 votes
4y
While you could, however the risk is your rent would not appear competitive unless that is how you whole market is doing it. People expect to pay for utilities.
Regarding RUBs, the key is to pick a standard way to divide it and stick with it. For example, based on number of bedrooms or number of people. Definitely do some more research and/or talk to property managers as I’ve been fortunate that my multifamilies have separate meters.
Investor · Nashville, TN · Member since 2020 · 38 posts · 57 votes
4y
@Stephen Jones
Agree with others this looks like a good deal on paper.
The parts where I’d advise caution:
If these are expenses from the broker, there is likely being something left out of the expenses category to make NOI be higher. I suspect your true expenses will be a tad higher.
Expect your taxes to increase post-purchase. Every county is different, so be sure to mind that in your projections.
If this is a screaming good deal, you can afford to hire someone else with due diligence reports. May be worth shopping around until you find one that’s done 70 year old builds. Mind any potential code violations, deferred maintenance, and your big ticket capex items(re-paving parking lot, loose handrails, amenity repair, roofing, scope plumbing lines, etc)
It’s unclear to me if you’re buying this with your money or other peoples money. If OPM, you’ll need to construct a sound business plan. Only reason I bring this up is because 1/1s are the hardest to justify rent increases for. 2BRs have the best potential increases for rent increases.
If you’re buying this with your money, hold it forever and you’ll look like a genius 🧐 haha
I know I said a lot, but I hope there’s something in there to help you analyze this deal.
Griffith, IN · Member since 2019 · 114 posts · 56 votes
4y
Stephen,
I respectfully disagree with some of the comments. This deal does not come out to a 9% cap. You have to add in your monthly mortgage payments and obviously that dramatically lowers your profits. Dividing the purchase price by 30 units does come out to $40k per unit. However, expenses are what matters. Expenses versus total rents is basically how your profit is calculated. With the numbers you supplied, I come out with a profit of approximately $3500 per month. That's not counting any unexpected large expenditures. Profiting $3500 a month might sound like a lot, but it only comes out to about a 3.4% return. The percentage of return is what matters. Here's an example: If you were at an approximate cash on cash return of 9%, your monthly profit would jump from $3500 to $8500. That's $5k a month, more than what you will be getting on the deal you presented. That's the "dollar" difference between a 3% and 9% return. That equates to the rents of approximately $850 a unit. I still stand by my statement that this is not a good deal. Remember too, you will rehab and maintenance costs. The total maintenance costs you quoted, comes out to only $41 per unit, per month. If a couple of tenants move and you have to paint the units and do some other minor repairs, you're only alloting yourself $500 for ALL repairs per year. Painting just 1 unit would cost well over $500. However, when I calculated the numbers, I left the maintenance costs where you had them. So if you raise the maintenance costs per unit, your return obviously drops even more. You also said the building was old. What kind of condition are the furnace's in? The hot water heaters? What if the plumbing goes bad? What if doors need to be replaced? What if the roof needs replacing? Allotting $41 per unit per month, on an old building, seems to be very low. One furnace replacement could easily run $2000 to $4k. Just one furnace going bad and having to paint one unit, could easily eat your profits up for an entire month. Remember too, you have 30 units! A licensed inspector can give you a good idea of what the issues are with the building and each unit. But repairs can eat your profits in a heartbeat! My goal here, is to give you the "entire" picture. Obviously it's your decision whether or not you purchase the building. Be SURE to no allow your emotions get in the way! When your dollar and percentage of profits are low, this is exactly how investors get burned. I hope this makes sense. Best of luck to you.
Thanks for the feedback man. Trust me, thats why I'm hear, I want the good and the bad.
With that being said, How are you coming up with that 3500$ month number? For some reason, I'm coming out about 1K a month higher than that (4500$). Where am I off?
Thanks for reaching out man! These aren't expenses from a broker. I know the seller personally so these are straight from him.
In those raised expenses I did calculate the taxes higher than what the seller gave me.
In the coming days I will be taking the city inspector through the property to see if everything meets code and to make sure there are no astronomical expenses that I am missing.
This purchase will definitely be a long term hold for me.
Edwardsville, IL · Member since 2017 · 82 posts · 44 votes
4y
@Adam Hughes I am also in the Madison county area. I'm an agent in the area but just now getting into investing. Would love to link up some time and connect!
@Stephen Jones whoops - looking at posts on your phone is hazardous to answers. It looks like a good deal but I still think expenses are too low. Make sure you review all the leases and compare to bank deposits if possible.