What do you think of this deal in Phoenix?

Question

Hi BP members!

What do you think of this multifamily property? Is it a good deal or just an average deal?

http://www.loopnet.com/Listing/19434737/1812-N-35t...

I'm new to multi family investing and want to avoid making any big mistakes if possible. :)

Dovid Staples · Answer

I saw this exact property a YEAR ago on that site! Says a lot that it's still up

Brian Volland · Answer

There is a massive amount of information that you'll want before moving on that property. With the market in Phoenix the way it is right now for multi-family, either the owner is severely distressed or the property is. I'm going to go ahead and guess the property just based on the area it's in just because that's typically a class D or E area. If you're looking for the often repeated "class 'C' property in a class 'A' area." then just walk away. Even if the numbers work out well, based on google maps street view and aerial photos, you're looking at a slum situation. Especially with the property being directly on a main road.

I looked up the listing broker because she didn't sound familiar and there are no property listings on her website so you'd have to contact her directly to get the info you need. Basic stuff like, how many Br/ba? Avg rent? What numbers specifically were used to arrive at that Cap Rate (taxes, insurance, maint, vacancy, cap ex, etc)? It's listed on LoopNet as a 7-unit, so why are there only 5 doors? Why are there only 5 evap coolers? Why does my primary MLS site mention that those evap coolers aren't in use? Why is there only info on the MLS for 2 of the, I'm guessing 5, units?

Numbers, figures, formulas, and metrics are your friend; they never lie.

Last thoughts, if you're looking to buy low, fix it up, bump the rents up, and sell, maybe look in to it. If you're hoping for a low maintenance Buy and Hold with no hassle, run away.

John Jacobus · Answer

@Jeremy Santy There isn't much info available on the listing to thoroughly evaluate the deal.  You may want to gather the unit mix, size of the units, gross rents, and actual expenses from the listing agent to get a better sense of how the property may operate going forward.

In the absence of more detailed information, I made a few assumptions and shared my work below to give you a sense of what may be baked into the listing price.  You can use this to determine whether the assumptions are realistic and determine where to probe further with the agent.  For example:  Is the advertised NOI of $36,000 achievable?  Do the rents and expenses reflect reality?  How long can this be sustained?

The first thing that jumps out to me with this deal is that the list price and cap rate suggest avg. rents of $800/month/unit.  While the listing doesn't outline the unit mix, I assume all 7 units are studios given the location of the property.  According to Retometer, the avg. rent in the area for studio apartments is ~$500/month/unit.  Can the units in this complex realistically rent for $800/month/unit?  If so, how long will they stay occupied?  Studio apartments turn over frequently and cater to transient tenants, especially in this location.  It's worth probing further here.

Additionally, the property is ~60 years old.  A 50% expense ratio may be too low.  It depends upon the recent renovations and age of key property infrastructure.

In general, based on the assumptions below and in the absence of more detailed information, it feels like the rent is overstated and the expenses are understated.   Additionally, a small multiplex of studio apartments is not ideal given the transient nature of the tenants.  These are just a few areas to consider as you evaluate whether this is a good deal or not.  Ultimately, I think you need to gather more details from the listing agent to adequately evaluate the deal.  Hope this helps.

Metric

Annual

Monthly

Per Unit/Month

List Price:

$210,000

-

Derived NOI (16% Cap Rate * List Price):

$33,600

$2,800

$400

Derived Gross Rent Assuming 50% Expense Ratio:

$67,200

$5,600

$800

Derived Net Rent Assuming 5% Vacancy:

$63,840

$5,320

$760

Diane G. · Answer

http://www.loopnet.com/Listing/19677951/317-North-17th-Drive-Phoenix-AZ/

Diane G. · Answer

this one looks much better to me

http://www.loopnet.com/Listing/19865837/6718-N-23rd-Ave-Phoenix-AZ/

6718 N 23rd AvePhoenix, AZ 85015

Diane G. · Answer

Not to sound harsh, it actually crossed my mind several times that properties like this one should be worth $0.... There are a few of them like this one now on loopnet....

Jeremy Santy · Answer

@Brian Volland - thank you so much for your insight. Very eye opening (in a good way). Also, helpful to know more about the area. Like you mentioned, I'm looking for a class C in a class A area, or better since I'm out of state and can't manage something closely. You've helped me make the decision to walk away so thank you so much!

@Diane G. - Not harsh at all. Exactly what I needed. I like the property you shared as well. Do you do any investing in Phoenix?

@John Jacobus - Right, there isn't enough info on the deal online. I emailed and ask for more info (talked to the listing agent on the phone too) and currently waiting on more info. The example you provided was super helpful as well. I agree, it's looking like the expenses should be much higher, and since I'm looking for something that I can invest in out of state with as few capital expenses to manage as possible this deal probably doesn't make sense on top of the tenants being more transient like you mentioned. Thank you very much for your help!

@Dovid Staples - Wow, I had no idea that it was up a year ago. :/

Thank you everyone for your help looking at this deal. I'm now more than confident enough to walk away!

What do you think of this deal in Phoenix?

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