How to Evaluate a Vacant 44 unit Complex

Question

Hi first time posting on this thread. A Little bit about me, I am an investor in Las Vegas who is looking to make the ultimate leap into multi unit complexs. My thought process is why start small? I have read the books by David Lindahl & Ken Mcelroy. I have a Mentor I work with and a mental coach. That is the extent of my knowledge other than reading every post on BP I can :).

I just started getting in opportunities by my broker and started a direct mailing campaign as well. My broker calls me and has a pocket listing that thinks I would be interested in because it is a fixxer upper. (which I do mainly only fix n flips in Vegas)

The complex is a 44 unit 1 bedroom complex, Within a growing and emerging area. Average rents for the 1 bedrooms is 400 in this area. It needs about 250k worth of work. 
	
	My question is this, How do I evaluate the worth of this complex? I understand I could always go off of future income which comes up to close a Million dollars. But, from everything I learned, and just simply being a buyer who does not buy retail I would never buy it on "future worth"

I do not have extensive knowledge on this area and open to all ideas, thoughts, experiences.

Please if you need any other information from me to make a knowledge answer please just ask I will get it to you immediately. I am sure I am leaving out valuable information that you are missing, which in turn means I should be thinking about when I make my Valuation.

Thank you for your time BP posters!

Also I would say all other property's in the area that are 1 bedroom complexs are at a 90% occupany. I will be verfiying that today by calling all complexs in and around the area to confirm their prices and vacany.

Stephen Masek · Answer

Paul, a home inspector is not probably not the right one for a commercial property such as an apartment complex.  I helped write the ASTM E2018 Standard for Property Condition Assessments (see the ASTM web site to buy a copy for a few dollars).  A Phase I (ASTM E1527), asbestos survey, and lead survey are also probably needed.  Companies such as the one I own generally provide that entire package of services in-house.  Sometimes we will hire specialists sub-consultants for tasks such as elevator evaluations.

By the way, a buyer is always wise to hire their own consultant, not one of those on a particular lenders list which "understands the bank's risk tolerance," as the risks of the lender and the risks of the buyer are very, very different.  The bank can not be on the hook for cleaning a contaminated property bought without a Phase I, even if they foreclose, but a buyer can.  A bank can not be fined or jailed for violations of the lead or asbestos regulations, but a buyer can.

Paul Timmins · Answer

@Amir Pasha Esfandiary

37 units is 15% vacancy not occupancy.

Allow twice the carry costs

Go to IREM.org look up and call 5 ARM certified property managers. Ask if they have experience in repositioning and how they would fill the units and their estimate to fill then add at least 30% more.

Have you walked the property and been into every unit? Consider hiring and ASHI certified property inspector the less surprises the better.

I stand by my initial comments leaning towards a momentum play as your first apt.

Paul

Joel Owens · Answer

I would have to know sq ft of the 1 bedrooms and current interior unit condition.

When property was first built will have an impact with lead paint, galvanized plumbing, asbestos, knob and tube wiring etc.

If the property is a gut job figure 10,000 a door for 1 bed. If exterior is in bad shape and roof, windows, parking lot, main water line, tree root issues pop up that could add thousands per door to the property.

When you use high debt service on vacant properties you want a fast lease up. So if going rental rate is 400 I would use 325 for the first year. Fill up fast with the best tenants and leave other owners with marginal to the trashy tenants. So base numbers and offer on stabilizing at a lower market rent and leasing closer to market in years 2 to 3 of stabilizing.

Generally the sweet spot is 50% occupied or higher to where everything hasn't been trashed yet and per door rehab is at a minimum to get performing versus full guts. Also when it is vacant the county/ city can hit you with extra costs like putting in a fire sprinkler system for every unit which adds a ton to the turn around. Lead based paint you will need EPA lead certified contractors.

Account Closed · Answer

Your right the rehab does seem too low, its been Vacant for a good time now.

And current properties around the said property pay only Electricity

Account Closed · Answer

I so appreciate everyone's input and you have made me think about a lot of different things I have not thought about yet. This is what is going on in my mind. And please correct if you see any errors or any thoughts on these numbers.

This complex is located in a C- area which is becoming a C+ area in my opinion. There is a massive influx in jobs in the area, and a revitalization to the community. Needless to say its up and coming, close to bus lines, and most of the other complex's are being purchased and fixed.

I called around today to all the different property's I could find and got a basic idea that all 1 bedroom units close to the same SQ are going for about $500-700. Mostly 500. And I did some market research on the area and the zip code itself is operating at about a 15% occupancy. Although every PM told me they were filling up as soon as units were opening up (I would say the same thing even if it wasn't true if I was a PM)

So here are my numbers of where I am at. And please correct me if I am wrong, I am a newbie :)

44 Units @ 15% occupancy is 37 Units
	37 Units @ 475 rent Monthly (I like to use conservative numbers)
	= 17,575 Monthly Gross
	x 12 Months = 210,900 Yearly Gross
	
	210,900 with the 50% rule for all Expenses and PM 
	= 105,450 Yearly Net 
	= 8757 Monthly Net
	
	105,450 at 10% cap rate is $1,054,500.
	
	But this is the FUTURE income that could be had. I must mention the average complex is going for about 7-8% cap rate which is huge equity for me I feel. But I do not want to speculate on what I would be able to sell it for just yet, and I want to make sure my numbers are safe for my ultimate goal of buy and holds.

Now this is just a estimate from my initial preliminary due diligence and I would need about 200k of rehab on this property to get up to par if not better with the other property's that would be my competition.

I would have to consider carrying costs of 6 months for rehab and getting the place ready for rentals. Which would come out to be with the loan around 60k. Like I said I like to conservative in my numbers.

So this is where I am at with my numbers. Please help. I feel like I am starting to get an idea of how to calculate all this information but yet still feel like I am missing out so many key pieces. I plead with anyone reading this, if you can give me ideas, thoughts, past experiences, or just anything it would help me out a lot.

The Newbie Sponge,
	Pasha

Paul Timmins · Answer

@Amir Pasha Esfandiary

Congrats on finding a pocket listing. Google the property name and address see if it was on the market and for what price.

Anything less than 85% occupied is considered unstable is a repositioning and Dave believes not a good first deal. With all of Dave's experience he will not touch anything that is not at least 70% occupied he learned his lesson. You will need bridge financing which costs more until it is stable.

What typically happens is you run out of money before it is stable becoming a highly motivated seller.

You use a break even analyzer for a property like this.

You would need to have the best of the best team members. A solid plan to provide all the cash necessary and to get the work completed and units filled.

You might consider wholesaling this deal to someone who is very experienced on these types of properties.

Good luck

Paul

Stephen Masek · Answer

Does that repair estimate include dealing with asbestos and lead-based paint?  When was it built?  What is the condition of the water piping?  What kind of heating and cooling systems are present?  How is the roof?  Is it synthetic stucco (many of the older ones had no drainage plane behind the synthetic stucco, so the structure rots)?    I'd be happy to look at / inspect it for you.

Joel Owens · Answer

You are quoting less than 5,000 a door for rehab. I believe if this vacant building is like most your estimate of rehab is way understated.

It's not just the interior of the property but all the exterior components and additional interior upgrades the county or city might require for code compliance.

If landlord pays water or other utility with current setup design then go 60% costs annually instead of 50%. If you want to convert where tenants pays all utility make sure for the area tenants utilities are not all included or you will waste money.

Dave Bingham · Answer

Amir,

It's not going to be a straight forward valuation. You mentioned repairs. Are these repairs that will impact the unit availability or are they cosmetic? Entering a deal where you have all your units available to rent immediately or where there is a lag time of 3-6 months will greatly impact its value.

The unit mix or lack thereof concerns me. Even 1 bedroom communities transform into other areas in time. You're then stuck  with an asset that you can't rent (liability) or do so but may not cover you O.E./ Debt service or you're agonizing over converting it into 2 bedrooms or something else that fits your market. You do not want to be in this situation. Almost any decision is the wrong one when you're facing that reality.

In general when looking at valuing a vacant complex I look at the following:

Unit Mix- As the demographics change will those units be able to offset the units that are "out of season"?

Unit availability- What percentage of units are available day 1 to rent?

Competitors- What are their rates and their occupancy? Dig deeper here, most stop here and think they know the market. Are they offering concessions? What's the job growth like in the area? What types of jobs are being created?

Lease up time- You will not be able to get to 90% occupancy quickly unless you give the units away. The carrying costs will not be offset during this time of reduced income.

Good luck with it!

Ben Wuollet · Answer

I am sure you have your own evaluation formulas but here is a brief example of how you may price this out:

44X400 per month ($17,600) Gross income monthly

X 6 mos ($105,600)

Divide by cap rate 10,11,or12 (CAP Determined by Grad of area C/ C- /D)

10% Cap = $1,056,000

-Repair Expense $250,000 = $806,000 divide by 44 units

= $18,318.00 (price per door) This would be a good buy:)

This is based on C grade neighborhood

How to Evaluate a Vacant 44 unit Complex

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