Considering offer on a MultiFamily (3)

[Peter Brooke]

Hi all,

Am considering putting in an offer on a multi-family in Manchester, NH. I have pre-approval for a 30 year standard fixed loan. The income/expenses are as follows:

Asking Price - $245,900

Gross Income - $2,790 p/m

Annual Expenses

Taxes - $5,237 

Insurance - $1200

Lawn maintenance - $870

Fuel - $636

Electric - $240

Water & Sewer - $2029.94

Its over 100 years old, which is typical for the area. It is also located on the better side of the city. Its a little dated, but in very good shape. It has vinyl siding and windows, updated electrical (seller is an electrician).

I will be putting down a 25% deposit.

Any feedback on the numbers would be greatly appreciated.

Cheers

Pete

[Troy Zsofka]

My 2 cents on this one:

@Ann Bellamy - I'm assuming that the reason the heat costs are so low is because the utilities are in fact split and the only heating expense is that for the common area (laundry + whatever). That would explain why the electricity expense is present but also so low.

@Peter Brooke - 20% for vacancy? Seems awfully high for a good neighborhood. I run the numbers below using 5%, but add in 10% for management. Also, I see lawn care but what about snow removal?

Gross Scheduled Rents: $33,480

Other Income: $1,200

Total Gross Income: $34,680

Vac. & Credit Loss (5%): $1,734 (I include the laundry income in this calculation because it is safe to assume that when you experience a vacancy, you will experience an equivalent proportionate loss in laundry usage).

Gross Operating Income: $3,2946

RE Tax: $5,237

Insurance: $1,200

Lawn: $870

Fuel: $636

Electric: $240 (seems low for 12 months of laundry)

Water/Sewer: $2,029.94

Property Management (10%): $3,294.60

Repairs & Maint (5%): $1,647.30

Total Expenses: $15,154.84

OER: 46% (Lower than 50%, yes, but the 50% rule is for quick assumptions and somewhat worse-case. 46% is realistic for a multifamily, but you still need to verify all of the known variables to be accurate).

NOI: $19,525.16

CAP (assuming $245,900): 7.94%

Now, I don't know the prevailing CAP Rates for 3-families in that part of Manch, but I would have thought they would be better; thereby suggesting that the price is too high.

Cash Flow: I'm going to have to make some assumptions here. We mostly stick to single fams right now, and we use cash derived from a line of credit cross-collateralized over a a few of our properties (as opposed to taking out loans to buy properties), so I really don't know what the rates and terms are for 3-unit purchase money right now. However, after the N/O/O bump, and probably a bump for 3 units, let's assume 6% on a 30-year term.

Loan Amount (75%): $184,425

Monthly P&I: $1,105.72

ADS: $13,268.64

CapEx (2%): $658.92 (First off, CapEx is not an operating expense; which is why I'm putting it down here. Second, with a 100+ year old property, you'd better factor it in, and 2% may even be light depending on the condition of the building at present. For example, if there is any significant deferred maintenance, I would want to back it right off the purchase price at the very least.)

CFBT: $5,597.60

Monthly CFBT: $466.47

@Ola Dantis - You came up with a much lower cash flow than I. Were you using different loan terms?

Cash-on-Cash Return: More assumptions here. Specifically that you will only be putting in your 25%; which means seller concessions are covering all the closing costs. This is important because if you have to put out more cash for closing costs, this measure is going to change potentially significantly.

Annual Cash Flow Before Taxes: $5,597.60

Cash Invested (25% Down Payment): $61,475

Cash-on-Cash Return: 9.1% (I don't know about you, but I wouldn't be super excited about this result.)

To do a real analysis, you should be more concerned with projecting out cash flows and resale value as best you can and running IRR, but I think that the Cap Rate and Cash-on-Cash shown here at least indicate that the price is too high for this property. Sure, you can force some equity by raising rents, but you should purchase based on current numbers, and save any value-add for yourself, not the sellers.

Good luck,

Troy