Intriguing deal? JV Partners?

Question

Hi my name is Skylar DeJesus and I live in Johnson City, TN. I have been investing for about two years now and love it! Unfortunately, I have hit a small road block in my investing journey and am trying to be creative to keep my journey moving forward at a steady pace!

Currently, I have two properties a triplex and a duplex but I am maxed out in my debt to income ratio and until I've had my properties two years I can't use the income to garner any more mortgages. So currently I am in the stage where I do not want to remain stagnant for the remaining two years but I have to be creative in my financing approaches.

In regards to the reasoning of this post, I have an awesome opportunity to JV partner with some one. I have known these investors and for a while and hey about owner financed a 6 unit to me for my first deal but we had got estranged through a cell number change. Long story short we have stayed pretty close since then and in a sense they have been mentors to me, great people. I recently seen them at an auction for a 23 unit complex. They explained to me that they are trying to liquidate their properties for a massive project. They offered me a pretty sound deal the only issue is I don't have the capital required to fund the deal I have about 1/5 of it.

Here's the basis of the deal:

12 unit property A rated neighborhood

Brick building built in 1978

asking 500k : said he was willing to owner finance with 100k down 5% interest rate with 5 year balloon

Another investor and I checked out the property this past weekend the units are also in A shape the ones we seen (2). There have been 6/12 tenants that have been there more than 5 years. Also, I think the most attractive part to this deal is that the rents are severely under market value and with a profit maximization strategy put in place to market value would increase the net income to about 40-45k/year. The numbers posted below are very conservative as are the properties finances CURRENTLY. There are many areas in which a profit maximization strategy can be used on this property which is one of the many reasons why this particular deal is attractive to me.

If anyone is interested in being a JV partner on this deal I would love to discuss this further as I have had my eyes on this property for a while and do not want to let this opportunity slip by.

Last, I live in an area where the market is thriving and real estate prices are very cheap relative to the rest of the country. I think this is a haven for out of state investors and would to engage in as many JV deals as possible to keep building my portfolio while I wait to be available for more financing.

Rental Evaluation	Enter values below to calculate:
Loan Amount (before downpayment):	$500,000.00	Property Price=	$500,000
Down Payment=	$100,000.00	Loan Interest Rate (%)=	5
Monthly Loan Payment (P&I)=	$3,163.17	Percent of Down Payment=	20.00%
HOA Monthly Fees=	$0.00	Loan Term (yrs)=	15
Monthly Home Owners Ins.=	$216.66	HOA Monthly Fees=	$0.00
Monthly Taxes=	$498.66	Yealy Home Owners Ins.=	$2,600.00
Monthly Maintenance estimate=	$340.00	Annual Taxes =	$5,984.00
Monthly Vacancy Cost estimate=	$75.00	Monthly Maintenance Expense % =	5.00%
Monthly Capital Expense estimate=	$370.50	Monthly Vacancy Expense % =	8.00%
Monthly Property Management Fee	$0.00	Monthly Capital Expense % =	5.00%
Total Monthly Costs =	$4,663.99	Monthly Property Management Fee % =	0.00%
Monthly Profitt =	$2,236.01	Rehab Costs =	$0.00
Annual Profitt =	$26,832.07	Purchase Costs =	$0.00
Debt Coverage Ratio =	1.48	Monthly Rent	$6,900.00
Annual ROI =	26.83%	Money needed up front =	$100,000.00
Months to break even=	44.72

Robert White · Answer

Skylar:I'm not in a position to help you, but did find and error in your math and your thinking.First, if the monthly rent is $6,900 and the vacancy rate is 8%, then the monthly vacancy cost is $552, not $75.Second, you need to factor in a fee for a property manager - even if you are managing the property yourself. Most investors would probably calculate 8-10%, so maybe another $690 per month.Next, I don't see any expenses related to sewer and water, or other utilities. Unless these are separately metered, you need to include a cost for them. Even if they are separately metered, you need to cover the expenses during vacancies. Depending on those factors, this could add another $200 to $2,000 per month.So, at best, your monthly profit is closer to $869. And that is before running ads to fill vacancies, etc.My next concern would be with your classification of this 12-unit as an "A-Rated" property in an "A-Rated" neighborhood. Here is a guide to help you with ratings on properties. A building built in 1978 would likely be classified closer to a "C". An "A" would generally be new construction, with newer amenities and finishes (security, granite, well lit, open floor concept, etc.)Likewise, an "A" neighborhood would tend to be an area with newer properties, a top-rated school district, high-wage earners, etc. In other words, in the best part of town, in a good town, in a thriving area. Now, I don't know what your property looks like, nor where it is located. But I have to guess that, with an average rent of ($6,900/12) $575 per unit, per month, it isn't an A/A.My biggest fear is that you might be (unintentionally) portraying this incorrectly to a J/V partner. Hopefully, they would question these numbers, as I did. But if not, you might leave yourself open to a lawsuit for misrepresenting the investment.From an investment end, if you managed the property and earned that $690/month management fee, you could earn $8,280 per year. But your J/V would, at best, earn (12 x $869) $10,428 on a $100,000 investment, or a 10.4% cash-on-cash return.I'm not trying to discourage you from the investment. But I am hopeful that you will reconsider the purchase price and really dig deep on the true costs of operation. You need to consider ALL potential expenses. A large reduction in the purchase price may be needed to make this one work.When I first looked at properties, I missed such things as mowing ($30-50/week?), painting ($200/unit?), cleaning between vacancies ($200+/unit?), eviction costs ($500-$1,000 per eviction, plus damages, plus lost rents), property tax increases (due to jump from $200k building to $500k that you paid), etc.I hope this helps you a bit in analyzing this and other deals.

Skylar Dejesus · Answer

@Robert WhiteMr. White,Thanks for your response!I would like to address some of your concerns.The monthly capital expenses are your water, sewer, and trash $4446 for the year which is the 370.5 you see in monthly expenses.The property is defiantly in an A neighborhood within a half mile of the best/largest high school in the area. Is very centrally located to our city's business district. They are condo style apartments which demand more rent in our area. I see this property as a good deal because rents are severely under market value for this area at $575 minimum rents for this area are $700.We would be managing the property ourselves. I do know most investors consider this in their calculations which I have but I didn't include it to portray what the investor would make more realistically. In regards to the vacancies half of the tenants have been there over 5 years and with only one vacancy in the previous two years which if anything shows you the quality of the property and area. I hope I was able to address some of your concerns and I would never intentionally or unintentionally misrepresent a deal to an investor I would not put the post up if it wasn't making good $$$ and if I didnt see a great opportunity to capitalize. I hope to speak to you more in the future!

Michael Moikeha · Answer

One of the things that I look at when I am deciding upon a hold property is what type of tenants will be renting from me? Sure Cap Rate is important, but constant turn over, evictions, and repair costs are often a bigger loss to income versus buying a lower cap rate property that rents $1500 range. Its personal opinion for sure, but it has worked for me. I am renting a home for $2700 in an area where most people get $2300. We did no paint or repairs to the property before the tenants came in, but we told them if they wanted to paint, we would pay for the paint and they can choose the color. If they didn't want to, we would just paint it all white. We have given them the ability to treat the place like their home, and in turn they have taken care of the property and improved it.I know this is slightly off topic, but felt like it was worth while to share.

Wayne Brooks · Answer

I agree with @Robert White, plus your repair/capex expenses are way to low.

Santos Collantes · Answer

Skylar thanks for posting. Really want to get experience on multifamily.Robert, great analysis. Very helpul. Thanks for seeing what us newbies don't see.

Matt Owen · Answer

Sounds like an awesome deal I'm pretty new and not entirely sure about investing out of state but I'd be interested in talking with you further. Please message me if you are interested in bringing in a partner who is newer to real estate. I'd like to discuss the delegation of duties and other specifics. I do have cash on hand to bring to the table. Thanks, Matt