underwriting Indianapolis and Kansas City deals

Multi-Family and Apartment Investing
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underwriting Indianapolis and Kansas City deals

Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes

I keep getting beaten out on these cash buyers and 1031buyers and it's driving me crazy.  I am actually underwriting correctly: 1. using the property manager's average expense per unit projections ($5000-5500) 2.    using the property manager's rent projections 3. 6 months of operating reserves 4. physical and economic vacancy never dipping below 10% (kc and indy long term vacancy is 10%, but currently is around 6-7% according to costar)   5. I'm using 3% rent growth (before the inflation craziness of 2021-2022 multifamily rent growth in both markets averaged below 2% for 20 years . Rent growth in indy at 16% and kc is at 8% according to Redfin currently YOY, but rents are trending down. 6. if you are looking at 40-180 units, in a b/c+ area in indy or kc, and built between 1960- 2002 cap rates are at 6-7% today and they are moving up 

How are people winning deals making sense of their underwriting paying $100k per door in Indy and KC? How can I  be MORE competitive and still be conservative ?  

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Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
3y

@Jason Malabute Can you explain what the 6 months operating reserves is? I'm not clear how you are building reserves in to your analyses and what the reserves are for. Also, I think the 10% vaacancy rate is high. We've been active in boooth Indianaplis and Kansas City and the vacancy rates have consistently run 5-6% but that will vary by class of neighborhood. I'm sure there are neighborhoods that are in the 10% range but those aren't areas that we choose to be in. 

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  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    3y

    @Jason Malabute Can you explain what the 6 months operating reserves is? I'm not clear how you are building reserves in to your analyses and what the reserves are for. Also, I think the 10% vaacancy rate is high. We've been active in boooth Indianaplis and Kansas City and the vacancy rates have consistently run 5-6% but that will vary by class of neighborhood. I'm sure there are neighborhoods that are in the 10% range but those aren't areas that we choose to be in. 

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  • Jason MalabuteBusiness Member
    OP
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
    3y
    Quote from @Mike D'Arrigo:

    @Jason Malabute Can you explain what the 6 months operating reserves is? I'm not clear how you are building reserves in to your analyses and what the reserves are for. Also, I think the 10% vaacancy rate is high. We've been active in boooth Indianaplis and Kansas City and the vacancy rates have consistently run 5-6% but that will vary by class of neighborhood. I'm sure there are neighborhoods that are in the 10% range but those aren't areas that we choose to be in. 


    Correct me if I'm wrong but don't you do SFH and small multifamily. I'm talking about bigger 40-180 unit deals

    Look at Costar. That 6% is 2021-2022. For 20 years prior to prior to pandemic indy and kc vacancy average around 10%. Again, I am not talking about SFH and fourplexes

    in multifamily you need operating reserves just in case a big ticket item needs to be taken care of or something else

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  • Mark Jones
    Property Manager · Indianapolis, IN · Member since 2022 · 150 posts · 59 votes
    3y

    @Jason Malabute, I could not agree with you more!  Unfortunately, these buyers are typically not underwriting correctly because they do not want to miss out on "deals" and these cash and 1031 buyers are willing to take a cap rate under 5%.  This is the market we are in right now, but I feel things are turning for the better.  The fears of the economy, increased rates and the fact that these buyers are seeing buying multi-family at a cap rate under 5% is not a sound investment should help make for more of a sustainable market.   Stick to your formula, you are doing the right thing!  

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    3y
    Quote from @Jason Malabute:

    I keep getting beaten out on these cash buyers and 1031buyers and it's driving me crazy.  I am actually underwriting correctly: 1. using the property manager's average expense per unit projections ($5000-5500) 2.    using the property manager's rent projections 3. 6 months of operating reserves 4. physical and economic vacancy never dipping below 10% (kc and indy long term vacancy is 10%, but currently is around 6-7% according to costar)   5. I'm using 3% rent growth (before the inflation craziness of 2021-2022 multifamily rent growth in both markets averaged below 2% for 20 years . Rent growth in indy at 16% and kc is at 8% according to Redfin currently YOY, but rents are trending down. 6. if you are looking at 40-180 units, in a b/c+ area in indy or kc, and built between 1960- 2002 cap rates are at 6-7% today and they are moving up 

    How are people winning deals making sense of their underwriting paying $100k per door in Indy and KC? How can I  be MORE competitive and still be conservative ?  

    Here’s what I learned as a rookie commercial real estate broker in 1978 and has served me well since; sometimes your BEST deal is the one you didn’t do.  
    There exist a wide spectrum of i potential investments out there. If multi family in Indianapolis doesn't make sense, how about multi family in Houston, Texas, or Starkville, Mississippi? Or office/warehouse in Des Moines? Or making low LTV hard money loans secured by multi family? Or investments unrelated to real property?
    I am totally convinced that more “bad” deals are made by investors trying to “force” a deal they know is too thin to be a good investment.  The other two options are (1) wait it out or (2) bite the bullet and hope we have nothing but green pastures ahead.  If you opt for the green pastures, be sure to have plenty of “staying power”.  In any case good luck.

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  • Solomon Rosenberg
    Investor · Rockland County, NY · Member since 2018 · 46 posts · 55 votes
    3y

    @Jason Malabute some of the buyers that beat you are in a lot of pain now,  chances are better deals will come soon. 

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  • Jason MalabuteBusiness Member
    OP
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
    3y
    Quote from @Mark Jones:

    @Jason Malabute, I could not agree with you more!  Unfortunately, these buyers are typically not underwriting correctly because they do not want to miss out on "deals" and these cash and 1031 buyers are willing to take a cap rate under 5%.  This is the market we are in right now, but I feel things are turning for the better.  The fears of the economy, increased rates and the fact that these buyers are seeing buying multi-family at a cap rate under 5% is not a sound investment should help make for more of a sustainable market.   Stick to your formula, you are doing the right thing!  


     thanks mark

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  • Jason MalabuteBusiness Member
    OP
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
    3y
    Quote from @Solomon Rosenberg:

    @Jason Malabute some of the buyers that beat you are in a lot of pain now,  chances are better deals will come soon. 


     thank you

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  • Jason MalabuteBusiness Member
    OP
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
    3y
    Quote from @Don Konipol:
    Quote from @Jason Malabute:

    I keep getting beaten out on these cash buyers and 1031buyers and it's driving me crazy.  I am actually underwriting correctly: 1. using the property manager's average expense per unit projections ($5000-5500) 2.    using the property manager's rent projections 3. 6 months of operating reserves 4. physical and economic vacancy never dipping below 10% (kc and indy long term vacancy is 10%, but currently is around 6-7% according to costar)   5. I'm using 3% rent growth (before the inflation craziness of 2021-2022 multifamily rent growth in both markets averaged below 2% for 20 years . Rent growth in indy at 16% and kc is at 8% according to Redfin currently YOY, but rents are trending down. 6. if you are looking at 40-180 units, in a b/c+ area in indy or kc, and built between 1960- 2002 cap rates are at 6-7% today and they are moving up 

    How are people winning deals making sense of their underwriting paying $100k per door in Indy and KC? How can I  be MORE competitive and still be conservative ?  

    Here’s what I learned as a rookie commercial real estate broker in 1978 and has served me well since; sometimes your BEST deal is the one you didn’t do.  
    There exist a wide spectrum of i potential investments out there. If multi family in Indianapolis doesn't make sense, how about multi family in Houston, Texas, or Starkville, Mississippi? Or office/warehouse in Des Moines? Or making low LTV hard money loans secured by multi family? Or investments unrelated to real property?
    I am totally convinced that more “bad” deals are made by investors trying to “force” a deal they know is too thin to be a good investment.  The other two options are (1) wait it out or (2) bite the bullet and hope we have nothing but green pastures ahead.  If you opt for the green pastures, be sure to have plenty of “staying power”.  In any case good luck.


     thank you

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    0Reply
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