Multifamily Deal Analysis

[Matt T.]

While researching a hypothetical deal, I came across an 18 unit building that seems to be vacant. After much Googling and many phone calls, I tracked down the realtor/property manager involved in this building. It seems I have found my first off-market deal! Woo Hoo!

We talked and she informed me that the owner is out of state and is looking to sell the building. They bought it in 2015 for $375k and she wasn't sure what the owner would take for it. This started me thinking about how much I can spend on this to make it worth my while. I got the feeling they are just ready to wash their hands of the whole property.

In a past life, I was a construction superintendent for an apartment builder. I also have experience in rehabbing commercial and residential properties. I have a single family rental and a 150 year old bakery that we rehabbed for my wife to run. I am ready to get into multi-family.

This takes me to the deal at hand.

Crunching numbers:

A little research let me know that I could get around $650-700 for the units in this area. I will be conservative an use $650 even though the two bedroom units should rent for more.

$650 x 18units x 12 months = $140,400

Vacancy at 10% will be 14,040

Taxes will be around $10,000 annually

I had property management quoted to me today for 7% so that is $9,828

Repairs are up in the air. I could use some input from you guys on estimating repairs, so I will plug in $10,000

All of the utilities are paid by the tenants, but for unforeseen expenses, I will plug $5,000/year.

This gives me an NOI of $91,532. At a 10% CAP that gives a property value of $915,320.

If I have $200k in the rehab (high), that gives a potential profit of $715k minus purchase price. It all depends on how much I am willing to spend on the building.

Does this sound like a deal I can get into? How much would you spend for this deal? There is some risk and I think the project can be 100% complete in 6-9 months. I will run the project and subcontract most of the construction.

I would like to think I can get this building for about $150-200k. I will probably be paying cash for the purchase and the renovation and I only have $400k to spend. I may finance some of it if necessary.

What say ye?

[Andrew Johnson]

Matt T.

They paid $375K 2-3 years ago and you’d like to think you can get it for $150K-$200K. So let’s say that it’s $175K and the owner pays 10% to cover realtor fees and closing costs. They lose $217K. And that’s assuming that they own it free and clear.

Let’s say they paid 25% down that leaves a mortgage of around $281K. You don’t pay off much in the first 2 years so maybe balance is over $250K. They net $157K from you and have to come out of pocket $92K. That $92K could pay for years of holding costs on a vacant property.

And, worst of all, if this was a $900K+ ARV then they haven’t seen $375K + $200K = $900K. Sure, there’s a chance they’re bad managers, don’t know what they’re doing, etc. but it’s far more likely they know many, many things about the property that you don’t.

All just random food-for-thought things running through my mind 🤷🏻‍♂️