Seeking Feedback on Multi-Family Deal Underwriting

[Michael Belz]

Hi Bigger Pocket community ,

I'm seeking feedback on a 6-family property I've underwritten in New York . The purchase price is $1.45M, with a current rent roll of $13K per month (market rent is about $16K). The NOI is $118K without a mortgage. I'm using funds from a 1031 exchange for the deposit.

Can anyone provide insights or guide me on how to refine my underwriting or ask the right questions to ensure my numbers are accurate and this is a solid deal?

Thank you!

[Greg Scott]

BEWARE

It is nearly impossible for NOI to be $118K with rents of $13K per month. That would mean you only have $38K of operating expenses each year, a 24% expense ratio. Most likely, the owner is doing all the work for free. If you had to pay someone to do that same work, the expenses would be, should be much higher.

FWIW, debt service should be below NOI. NOI will not be affected by whether or not you have a mortgage.

I'd urge you to reconsider this deal. 

[Michael Belz]

Correction , Current rent is 13,700 per month . 164,400 per year 

[Kyle Miller]

Quote from @Michael Belz:

Correction , Current rent is 13,700 per month . 164,400 per year 

 Hi Michael,

If you were to have an 75% LTV (~$1.08M) with a 25yr amortization rate with current interest rate of 6.50% (FHLBB 5yr + 2.50%) you're looking at a payment of $7,342.88/mo., P&I. With a 5% vacancy and a 32% expense ratio (without looking at the property) the model projects a healthy Standalone DSCR of 1.21x. I've provided additional expenses for any unexpected expenses during your first year of ownership which results in a NOI of $106,520. Depending on how much you're putting down that would change your projection.

If you wanted an 80% LTV (~$1.16M) with a 30yr amortization rate with 6.50% your payment would be $7,361.99/mo., P&I. Both of these hypotheticals would adjust slightly due to the PMT formula with excel. Hope this helps!

[Michael Belz]

Great insights, Thank you all 

[Evan Polaski]

@Michael Belz

As others noted, you provided very little insights to be able to help too much.  But a couple things to note:

What happens to real estate taxes when you pay for 1.45mm?  In my jurisdiction, they will adjust your taxable value the day you close, and if it has been a while since this deal closed, often times the taxable value that seller is paying on has not kept up with market values.  You could see a big jump from seller's tax expense to your own.

Have you gotten an insurance quote?  This is pretty easy to obtain from calling a couple brokers, but could vary greatly between what you are quoted and what seller is paying.

Age and condition of building?  Older buildings with older systems: plumbing, electric, HVAC, roof, tend to have more maintenance costs than newer properties.  

Finally, at the end of the day, you really can't rely on the seller's financials for anything meaningful.  While there is always a chance they are not disclosing things, i.e. doing the maintenance work themselves and not booking it, the more likely scenario, at least in my case, is nothing needed repaired that year at that property. 

If tenant's renew, there is no turnover cost.  And the other things, while you should plan for them with some monthly holdbacks, may only arise every couple years, like a plumbing leak, or an HVAC repair, or leak in the roof.  But when they arise, they often cost several thousand dollars or more, hence the budgeted holdbacks.

[Gino Barbaro]

@Michael Belz

A couple things to consider that do not show up in underwriting. What is the age of the building? Is it old and in need of significant cap ex?

What is the median income of the area? Can it support pro forma rents?

What is the current values or comps in the area? Are they close to what this deal is listed for?

Other questions to ask, Why are they selling this deal? How long have they owned int? What type of debt does the deal currently have? What type of cap ex has been spent on the deal the past three years? Can I see a list of loss runs for the past 5 years?

These are just some important questions to ask. The key is to not find the right answer, but o ask the right question that will lead to the answer, good or bad.

Gino

[Michael Belz]

Thank you, Gino, for the great questions. I'll be sure to request that information from the seller. It's incredible how much valuable insight comes from the BiggerPockets community, and I really appreciate it.

[Abel Curiel]

Quote from @Michael Belz:

Hi Bigger Pocket community ,

I'm seeking feedback on a 6-family property I've underwritten in New York . The purchase price is $1.45M, with a current rent roll of $13K per month (market rent is about $16K). The NOI is $118K without a mortgage. I'm using funds from a 1031 exchange for the deposit.

Can anyone provide insights or guide me on how to refine my underwriting or ask the right questions to ensure my numbers are accurate and this is a solid deal?

Thank you!

 Hello Michael!

I'd echo everyone's questions here, you've gotten some great feeback on this forum!

Being that this is a 6-family, I'd also find out if it is rent stabilized. Many NY apartment buildings with 6+ units built before 1974 are rent stabilized.

You can look up the building here to see if it is on the rent regulated building list.

All the best to you on your search!

Abel

[Wil Pollock]

@Michael Belz

If it's 6 units it's most likely rent-stabilized (based on age it could be rent-controlled 😬). This applies to nearly all buildings six (6) or more units in NYC or any of the Rent Stabilized localities throughout New York State.

I'm NOT active in New York City (or suburbs) any longer due to these guidelines or myriad other anti-landlord rules & laws; however, I can say many realtors do NOT understand what they're selling so BEWARE:  I've had realtors say the units "have preferential rents, isn't that great?" No. It's not. Pref Rents are below "legal max" and can potentially remain there forever (or as long as that tenant exercises their legal right to renewals... allowable increases are based on the Pref rent as well. So.. please be careful buying in NYC or any of the Rent Stabilized localities throughout New York State.

Good luck!