Give me your Opinion on this MF purchase! Good, Bad, Ugly...

[Trent Barga]

3x 4 unit buildings. Yearly rent is $93,900. Sellers want $1 million. They don't have P/Ls etc. They inherited from father and these properties are slum but in a great town where a SFH 2/1 800 sqft rents for $1100. I'm assuming $32,400 in expenses with a NOI of $61,500. So rents are low and could get up to $900/unit once some of the properties are updated/rehabbed. Could get average rent of $750 as is.

$1,000,000 PP; NOI=$61,500; 80%LTV 5.5%; DSCR = 1.13 (with a 5% reserve for vacancy)

- Issue would be getting a loan because it's below the 1.25 threshold; Thought about going to $1.1 Million and get $100,000 seller credit for repairs and up the rent within 1/yr

Within 1year assuming 90% occupancy:

NOI = $84,240 with an assumed value of $1.7 Million with a 5% cap rate; Generates just under $24,000 net cash flow (brings dscr to 1.55)

Ideal price I would like to pay is $750k but I don't believe that is happening.

[Matt Ziegler]

Write up and submit the offer! Give them an Opportunity to counter, ya never know!

Cheers

[Sergey A. Petrov]

Run your numbers, make an offer that make sense and proceed from there. No bad outcome from trying to get to the negotiating table. 

[Susan Guzzo]

For those of us playing along at home, what would be a reasonable offer? What would the numbers say? Would love to learn.

[Chris Seveney]

@Susan Guzzo

Way too little information. Guessing on NOI and costs is a recipe for disaster. Also need to know overall condition of the buildings and how much $ is required to bring them up to livable standards

Based on comments of “slum” we took over similar project (3 quads) in Vermont and had to spend $100k per building to get them livable as had to install new heating, hw tanks, redo kitchens and baths and windows etc. Some units had to be completely gutted due to rats.

[Felipe Stefanoni]

Things for you to think about and do some research on the underwriting
1. Taxes - call the county and check how taxes are reassessed (if on sale date or from 5 to 5 years) and use this number to calculate your NOI
2. think if you can bring value ad to increase your NOI ( even tough you have small units) like pet fee, covered garage parking, premium apartments, etc

3. Check how you could lower expenses  (if tenants don't pay for utilities you could do RUBS)

4.When you submit your offer send a letter why you can't meet their price 

5. Try to understand what they need ( is it timing, just price, etc). 

[Mike Smith]

@Trent Barga Your expense ratio is 34.5%.  That seems extremely low for D class properties.  I typically see expense ratios above 50% for "slums".  Most brand new, large scale (100+) multifamily properties are running expense ratios around 33%.  

I agree with @Chris Seveney, I feel you are guessing at gross rents and also guessing at expenses.

I also feel with D class properties there is way more room for things to go wrong.  Your going in cap rate is 6% with your low expense ratio (and closer to 4.5% with a more reasonable cap rate).  I would want a going in cap rate of 12% for a D property.  You can probably purchase brand new multifamily with a legit P/L statement for a 4.5 cap in smaller town.  Why you would purchase a slum for a 4.5 cap is beyond me....

[Taylor L.]

I say it's probably a no unless you get the deal for a song. You need to quantify the amount of immediate physical work the properties need. Even with thorough physical due diligence, you're going to have a big headache with the capex. There will be gremlins waiting for you at every turn. Risk needs to be factored into your calculations and the offer should be adjusted accordingly.

$900/mo target rent is hard to justify the amount of capex these properties probably need, based on your description as a 'slum.' It's unfortunate for the current tenants that the properties haven't had better care.