Looking for ways to approach this Multi Family any Ideas?

Question

Price:$14,240,000 No. Units:178 Building Size:183,648 SF Price/Unit:$80,000 Property Type:Multi family Property Sub-type:Garden/Low-Rise Property Use Type:Investment Cap Rate:8%Occupancy:94%No. Stories:2 Year Built:1979 Scheduled Gross Income$1,740,840 Operating Expenses$525,393 Net Operating Income$1,215,447 What would be a good way to approach this property?

Joel Owens · Answer

I won't even go into it much except to say this is a horrible deal.

The loan you are talking about is hard money. Interest only at 8 to 12% for 1 to 3 years is a disaster of epic proportions. Those type of loans are typically only used for value add type properties for short term with say 50% occupancy where you are refinancing out after a year or selling off to retire the debt.

No way do I believe the expenses are that low. If they are the seller has been patching things instead of maintaining properly and there is a lot of deferred CAPEX to deal with. As mentioned if landlord pays water go 60%. I have never heard of a lender closing a deal this size in 2 weeks. Saying the lender would throw out 14 million in 2 weeks without any due diligence even for a hard money lender just doesn't make sense.

Do you have 5 million of your own money for the down payment?? People see big money in big properties but there is also a ton of risk as well. A deal of this size would typically take 2 to 3 months to close with the best time and if survey, title, other issues had to be worked through up to 6 months.

Jean Bolger · Answer

another way to parse this would be $80,000/unit, each bringing in $815/mo rent... before vacancies. Not very inspiring.

Jeff Greenberg · Answer

I won't repeat  what @Joel Owens  and Account Closed  Have said, but this looks like a 6 cap deal. To get conventional financing, you would need to come up with the 25% down and closing costs.  Then you need to qualify with net worth equal to the loan amount, liquidity equal to 6-12 month debt service. And 3 years experience with this size property.  Jump those hurdles and then you would have property that you over paid for.

The big numbers on these kinds of deals are mesmerizing, but reality must set in.  If the numbers where great, maybe could wholesale it.  They are not even good at that price

Account Closed · Answer

Thanks Joel for chiming in. I missed his 2nd post. Since he left everything blank, I bought he was asking for terms & rate. Great catch.

Let's see. Seller is selling a building with 30% expenses at 8% cap rate. Loan is at 8-12%. Ah, he's in a hole from day 1. That's cool. Putting $5M down and be in a hole from day 1.

Barrington, no disrespect, but it looks like you have a lot to learn before you can play in this league.

Account Closed · Answer

Barrington,

Sorry, wife called for dinner so I had to cut it short earlier.

Here's my 2 cents. Even with the mild Bay Area weather, 6% property management fee, 1.4%-1.5% property tax, and $300/unit for insurance, 5% vacancy, we still came up with 40% for operating expenses. Thus, the 50% rule for operating expenses is very reasonable. If owner paid for utilities, your operating expenses can be as high as 60%-70%. With the latter operating expenses, this property is a dog.

With the 50% rule, the number doesn't look bad. I believe that you can get a 5/1 ARM at 3.5% interest rate amortizes over 30 years with 25% down. You're looking at 8.3% cash on cash return. You will also gain about 5.7% annual return from principal pay down, but you will not realize this profit until you exit the property.

If there is potential for value add and room for rent increase, this could be a gem. However, you have to compare the cap rate of this building compared to other recent sold buildings in the area to see if it's a good or bad deal. After all, real estate is local. If this building were located in San Jose, we would have bought it yesterday.

Hope my rambling makes sense. Good luck sorting things out.

Account Closed · Answer

Barrington,

I'll let the expert to give you some real advice, @Joel Owens . You may not like what he has to say about the actual operating expenses.

Account Closed · Answer

30% for operating expenses? That seems quite low. Therefore, no way this is an 8% cap rate.

What are you looking for? Best terms or best price? Is seller willing to carry back? If yes, how many percent, for how long, and at what interest rate?

Thierry Van Roy · Answer

Going to be a contrarian here: When talking this size, I would throw the 50% "rule" out of the window. There is a thing called economies of scale, you know.

That being said, hard money at 8-12% is ridiculous. Also, what's with the 1-3y term?

I'm currently looking at 5 buildings of about 1 million USD each. Each of them gets a complete dossier of over 60 pages in order for me to secure 70%, 4-5%, 25y financing at the bank. This includes a detailed DCF of 20 years, IRR at 10, 15 and 20y resale and a three-way scenario analysis.

That's before negotiations have even started (I have looked at the units though). And even with all this, I wouldn't dare going for this big a venture.

And yes, even by my most prudent estimates, the "Rule" is no more than 40%, including a reserve buildup for some serious structural rehab and property management.

I suspect you have some serious capital for a down payment at least. In that case, try your hand at smaller deals that get bank financing. Money is more-or-less free right now, keep those hard money lenders for when deflation kills the market.

Scott Sewell · Answer

Hi Barrington,

My wife and I are just small MF investors, but I'll bite. She's also from Newport News and we are interested in investing there in the future. Hence the interest in your post.

First, I have a couple of questions. The expenses for this property seem VERY light at 30.2%, (doesn't meet the 50% rule) are these from a disclosure? This property will absolutely need property management, is that in the 30%? Is the scheduled gross after vacancy? What are your exit strategies?

Assuming a full price offer, the scheduled gross is after vacancy, following the 50% rule for expenses, and a 30yr amortization @ 7.5% (as high as my little calculator goes) I'm showing about a 1.3% ROI on almost a 5 million dollar down payment (35%).

Doesn't look like much of a deal with the information given. Just my opinion. Hope you and yours are staying warm. Good luck, and Good investing to you!

Looking for ways to approach this Multi Family any Ideas?

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