8 unit property - Would this be a good deal?

Question

What do you think? Good deal or a pass?

The numbers:

Seller wants $2 million dollars.

6 units are 1 bedroom and 1 bath and rents are under market by around $500 to $600 each.

There are 2 : 2 bedroom and 1 bath units: One rented out and the other will be vacant at close of escrow.

Total rents for : 6 1 beds and 1 2 bed: $10,100

And the vacant unit would rent out for $2k

As is with out doing anything to the property, total rents would be $12,100.

(Currently, assuming a 30% overhead : or

$12,100 x 12 months: gross rents annually- $145,200 minus 30% (operating) : $101,640 net income.

At $2 million : that would be a 5% CAP rate (my commercial co-worker says that most are selling at a 3% or 4% CAP right now).

Over time, what would be the value if you increased rents to market rents:

Conservative numbers: 1 bedroom : $1800 (can go to $1950) x 6 units : $10,800

2 bedroom: $2k (could go to $2300 / $2500 )  x 2 units : $4k

Total pro-forma (estimate new rents): $14,800  (times 12 months: $177,600 minus 30% :

$124,320 (NET)

Future value :

@ 4% CAP : $3.108 million

@ 3% CAP: $4.144 million

Does buying this property at $2 million make sense?

(I usually do residential deals between 1 and 4 units, so looking to see if you think I am missing any info?)

30% Operating expenses seems generous to me, as most commercial agents have told me that these could be brought down to about 27% of gross rents.

Units will need about $25k to $30k each (8 units ) so that would be about $240k

Plumbing has been replaced to copper in the last 10 years.

Roof is also about 10 to 15 years old.

AC : building has wall units. (I am getting more info about rents, leases, and expenses).

Thanks for reading

Sebastian Marroquin · Answer

update on the 8 unit: offer accepted for $2 million with no contingencies. They will add 2 ADUs to make the unit count 10 and they will increase the rents to a total gross rents of $20k per month.

Not bad

Karl Denton · Answer

Hello Sebastian,                         Basically your looking at 250k a door, I know your on the west coast so im sure that's pretty good out that way. The numbers seem to report well, basically it comes down on how your financing it. I know when I ran numbers on a commercial property the numbers were so tight based on having the larger monthly mortgage. One thing I can tell  you is to run your own numbers. ProFormas don't always show the bad, they show the good and get you excited at times. Make sure you think about the worse case scenario and not just the best case.

Sebastian Marroquin · Answer

I will be finding out the capital expenditures for the last 10 years and will be doing a formal inspection of the whole property.

The deal is pretty good right now bc it is off market and the seller wants $2 million.

But my suggestion to the seller will be to go to market as he will likely get closer to $2.5

Unless he wants to take the current cash offer of $2 m.

Thanks for your input :)

Sebastian Marroquin · Answer

Thank you for the response : you bring up great points! I will be the listing agent on this property and gathering all the info you describe above. I will be adding the 10% vacancy and CAPX and Managment fees. I forgot to account for a re-assessment. But It is in my list of items to include and to assess for in underwriting the deal. I know the seller well (wife’s family member) and why I know the upgrade bids will be fairly accurate (although, we will have a formal inspection and contractor to get more accurate numbers). Tenants are paying on time and have leases and deposits in place : rents will either go up gradually or buyer will offer cash for keys as the rental market in that area or most of LA is very positive and filling in the units would not be a problem at all.

The financing portion of it is a bit foreign to me as this time and will be talking to lenders I use for the residential side. The potential buyer will be all cash and no contingencies at this point at $2 million dollars. He is a contractor and knows exactly what he is buying.

Thanks for your input!

Sebastian Marroquin · Answer

Thank you for the response: this is a hypothetical buy for me right now since I don’t have the funds for it. (I will be the listing agent on it and the numbers are conservative as I left about $100 to $200 out in efforts to be conservative). I like this conversation because I do plan on buying a building like this in the next 2 to 4 years! :) thanks

Glen Gallo · Answer

location is key what are the demographics

$600 for a unit in SoCal seems really low. Especially in greater LA. Why is this so?

What are the capital expenditures over the last 10 years?

The deal you have seems great which gives pause as to why

Brad Hayden · Answer

@Sebastian Marroquin

Good advice from @Karl Denton - pro forma is only a starting point and there are many questions to be answered before you decide if it's a good deal.–– even if all units are occupied, you need to include 5-10% economic vacancy factor in underwriting–– look at each expense line item to ensure it's reasonable and fits with your management structure –– property taxes will be re-assessed and likely go up after purchase–– get a new insurance quote -- your coverage and costs may be different–– get a professional roof inspection -- depending on type of materials and past maintenance, you may be looking at a new roof very soon–– is the $25k to $30k unit upgrade number based on recent material costs increases –– how will you accomplish the unit upgrades and what impact will it have on cashflow–– who are the tenants? If you raise rents, will they stay or leave? If they leave, is there market demand to replace them at the higher rates? –– what are your financing assumptions? Rates are going up and underwriting is getting tighter which means you will likely have to bring more capital to the deal which changes your investment metrics.–– just because other properties are selling at a 4% cap rate doesn't necessarily mean this one should

8 unit property - Would this be a good deal?

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