Advice on 22 unit deal??

[Drew Carlyle]

I am Drew. This is my first post though I have been reading bigger pockets for a couple of years. A little history. My dad and I have 20 single family rental units (about 80% owned free and clear). We rent these for about 600 per month on average and bought them all for less than 50k by the time they were rent ready. We been considering multi-family to help grow/expand our portfolio and because we are having a harder time finding these houses. So with that being said, we found a 22 unit complex that they are asking $730000 for. Here are the basic numbers. Units - 22 Rent - 550 (1 at 490, 2 at 500 - old leases) Total monthly revenue - $11940 Expenses His financials from 2015 Advertising - $0 Electricity - $177 Lawn care - $180 Management - $0 Maintenance - $0 Gas - $61 Pest control - $80 Phone/internet - $214 Insurance - $525 Security - $58 Trash - $561 - includes units Water - $166 - includes units Total monthly - $2025 Financing for 20 years Down payment - 15% no cash required lender to use existing property as collateral Financed amount - $620500 Rate - 4.5% assumed. It will be close to this. Monthly payment - $3950 Total cash flow is 5900 per month based on his numbers. I assumed 900 per month for maintenance and I know my manager expense will be close to $1200. I also added in servicing the septic system at $50 per month since I know there is once of those also. Then I increased his numbers by 10% just to be conservative and put a 10% vacancy rate to come up with my estimated cash flow of $2418.5 per month. The property also has the potential to put a 23rd unit into rent. Which would help cash flow a lot. I think I could charge the tenants for water and Bill them for trash also to help lower my expenses. Any advice you guys have would be greatly appreciated! Thanks in advance Drew

[Joel Florek]

@Drew Carlyle Not sure I understand your thinking on the collateral meaning no money down. A purchase price is a purchase price. If you are using your equity from your other properties you would take out a loan on that property to get cash then hand it to the banker as your down payment for this property. I would count this expense into your deal unless you feel you would rather keep it over on the other properties.

Another point, why is garbage over $500 a month?! I have 2 dumpsters that get picked up twice a week at my 16 unit building and it costs me $120 a month. That same plan would be sufficient for your property. Price may vary slightly but not significantly.

I think you should restructurer your financials a bit different. When analyzing multi family properties your valuation is all based on Net Operating Income or NOI. You want to determine what your expenses are, excluding financing, on an annual basis. Depending on what the market cap rate(another vital piece to understand in multi) is in your area for you class of property you are looking at you can determine what the market value of the property is. Based on this you will decide based on a number of factors, primarily qualitative, whether you will pay a premium, market rate, or require a discount from the market rate NOI. Your financing package also plays a big role in this decision which is the primary quantitative piece of the decision.

I would be happy to get on the phone and talk through this a bit better. Multi family valuations are simple, but vital to understand if you want to scale up past the single family home. Just because it cash flows doesn't mean you got a good deal as people typically think with single family.

Message me and we can set up a call.