Need help evaluating a deal please

[Shannon Cannon]

I could use some help evaluating a deal please. Short version--I've done some flips, but wanted to get into buy and hold. Ran into a man willing to sell his 8 plex that flooded last year in Baton Rouge. A little nervous about the big jump from looking for a couple properties, to purchasing a 9 plex, but think it has a lot of potential. Appreciate your input!! 

8 units, 1000 sq ft each (completely gutted to ceiling. electrical, plumbing, hvac intact, but ac units need replaced)

He wanted 45$ sqft, will take 40$ sq ft or $320,000 (we wanted 35$ sq ft. -280,000 but felt ok to do $300,000) Feel like $320,000 will be ok, will just have less wiggle room with renovations. Need to keep loan under $500,000, so leaves $180,000 for renovations. 

Local banker said they usually do 5/15 but can do 20 year, assuming that would be 5/20. About 5ish %, so we did 5.5 interest rate on high end to run the numbers. We're thinking we could do renovations for $150-200,000. Banker said they might can do the loan based on the ARV, so depending on what that might be, we might not have to put very much cash down. Would try very hard to keep the total at or below $500,000. So based on that number, this is what I've come up with so far...

$3440 note at 5/20 5.5% $500,000

Insurance (agent gave quote with foremost) $6000 annually

flood insurance waiting on quote but thinking $2000 high end annually?

Property taxes $5000 annually apx

Maintenance--$1000? annually apx (thinking we won't need much repairs on new renovations?)

TOTAL expenses==$55,280

He said he rented his for $850 before the flood. I'm thinking $800 might be a good guaranteed number, but could potentially get up to $900 for newly renovated. So going to do the math for both 800 and 850.

Income @ $800==$76,800- 2% vacancy (is that an accurate %?)==$75,264

Income @ $850==$81,600-2% vacancy==$79,968

So @ $800 cash flow would be $19,984 annually and @ $850 would be $24,688

I know that looks good on paper, but I feel like I must be missing something. We will be subbing out the renovations, and I haven't done a complete breakdown yet, but did a rough estimate.

I have no idea of appraised value. The only multifamilies for sale at the moment are closer to LSU, and I'm assuming the prices are higher there. But a 4 plex, good condition, looks like it might run about 500,000 near LSU. The area of this 8 plex is a very decent area, I'd say B+, maybe B-. If I had to guess an appraised value completely renovated, I'd say 700,000 easily maybe? Average price of property is 100$ a sq ft pretty regular around here. Rental rates are 1$ sq ft most places, esp SF homes.

Sorry you've spent your evening reading my novel!! I just wanted to include as much info as possible so you can help me see what I may be missing and if this seems like a good investment deal!! Thanks again!!

[Jordan Grimstad]

Taking your insurance, mortgage, tax, and rent estimates at face value (I assume that these are fairly certain/stable), you might be a bit optimistic on your expenses:

- Vacancy: I don't know if 2% is the right number or not, but just to sense check - 2% vacancy means that you have no more than 1 week (on average) to turn over a unit, assuming it's fully occupied and each unit turns over once a year. If people tend to stick with longer leases (2+ years), this might be a safe assumption, but if everyone's on a year to year lease, this might go up a bit.

- Property management: do you plan to property manage the building yourself? Sorry if I missed the context somewhere in your post - if you don't plan to manage the building, you'll want to include those expenses as well. Even if you do plan to property manage, it would be good to build that scenario just to understand what your risk is in case you need to stop managing it on short notice.

- Maintenance: $1k/year - I'm fairly confident this is optimistic (or, at the very least, assumes a very short holding period after your renovation). Sense checking this, $1k/year assumes $125/unit in maintenance per year - if you call a plumber or an electrician for a unit once all year, you've likely exceeded your budget; this also doesn't include maintenance on common spaces for the building (although this could be wrapped into property management).

--> If you are hoping to hold for the long term, you'll have to budget for capex as well - you have to assume some lifecycle on major appliances - if your water heater(s), air conditioning, electrical system, etc. go out, you'll likely be looking at a >$5-10k expense for an 8 unit property

On the point about maintenance - while I feel confident that your number is fairly low, I'm not sure of the best way to go about estimating expenses on a small-medium apartment building is - I'm guessing it's a per-unit $ outlay approach or % of purchase price/year, but I think a more experienced investor will need to weigh in on this one.

Just double checking - how much cash do you need up front for the note + renovations?