Potential Large Multifamily Deal

[Michael Logan]

Hello All,

I am looking for any input you're willing to give regarding this deal.  

** Seller is asking 2.5M for 66 units, as-is of course.  He says he is selling because he has an opportunity elsewhere right now.

I've been told the cap rate for our local area is 6%. Rents after renovation are conservatively $550/month on average, $625 on the high end. This complex is the only thing bringing this area down. It's located in the city with the most desirable school systems in our area.

48 Unit Apartments

• All 2 bed, 1.5 baths.  More than half of the units are vacant, bad tenants being evicted.
• June’s gross income was approx. $15k.  This will decrease as tenants are being evicted.
• Only 2 Units are close to being completely renovated.
• Most appliances were beyond repair.  All units will have dishwashers.
• Annual Taxes and Insurance currently $17040
• Roof:was told it was approx. 6-7 years old. No documentation.
• All new windows and HVAC units purchase and being stored within the two 6000 SF basements.
• All HVAC units already installed except 12
• Has on-site laborer for window inst.: $38 per window to remove and replace.
• Office and Laundry have been renovated.Owner pays approx. $500 per month for utilities.
• Guys working for him at the moment would like to stay.
• Cabinet guy makes $15/hr.  Would make an excellent maintenance man.
• 5 or 6 sets of cabinets ready for installation now.
• 3-4 laborers making $8-10 per hour
• 8-10 units have been completely re-plumbed
• Current owner has probably spent about $400k so far ($5-6k on landscaping)
• All units are about 850 SF
• Renovation Estimate: $11,000 per unit (46 units) + 20% contingency fund = $607,200
• Tenants pay all utilities.
• Includes Pool

Townhouses (18)

• Only 4 vacant units.
• Roofs are all in decent shape.
• None of them should have to be gutted. They are in decent shape.
• Maybe sell them with owner financing one by one.

Any advice is very much appreciated.  Would you chase this deal at all?

Thanks,

- Michael!    

[Joel Owens]

At 550 per rent unit average and taking away 50% annual operating costs I get about a 3,100,000 valuation at a 7 cap for resale.

2,500,000 purchase + 607,000 reno costs = 3,107,000 value

So basically you would have zero equity after stabilizing and when you sell with resale costs you would be likely taking a loss.

With 3,100,000 in you are at about 47,000 cost per door for 550 rent so just above the 1% rent to purchase price guide.

Unless the land is very valuable for redevelopment it seems like a ton of work for very little if any return. Sounds like the current owner paid XX for the property and found out it was a money pit with repairs. Now wants to try to sell off the "potential" to someone else and get out of it.

Would be a pass for me. 550 rent per month units tend to be "high touch" to manage and make the income stream go.