Great value add or money pit?

Question

This is kind of a follow up to a previous post regarding this property.

20 unit property...twelve 2/1’s and eight 1/1’s. Property is currently owned by my family’s estate and we have it under contract to purchase for $375k.

Taking the advice of many here on BP, our first order of business was to secure a great property management team, which I’m confident we’ve done. Second order of business, see what rehab needs to be done to command the most rents for the market.

I felt that we had a fairly solid rehab budget, and we’re close to approaching the bank for the financing, when things started to go south!

One of my proposed  electrical contractors found numerous code violations....costly code violations!

We had planned to upgrade all 20 service panels and relocate them to a wall, outside of the closet they’re currently installed in. The electrician is worried about some of the wiring to appliances being aluminum, he’s also concerned about the lack of a disconnect between the meter and the service panels.

We feel that we could be approaching and possibly exceeding 20k per unit rehab cost, so my 375k deal will wind up being 775k!!!!  I know that’s still only $38,750 per unit after rehab, but it really changes the appearance of this investment. We’d really hoped we could max out at 10-15k per unit, but I guess that just can’t happen.

I really need advice, pep talk, something, lol!

Rhett Tullis · Answer

id be pretty skeptical of the rents they are quoting you but it would also depend on the area the property is in.  that is on the high end for a 1 bed in okc unless there is something special about the property .

Joel Owens · Answer

Tab are all the 8 acres buildable? What are the zoning density laws per acre allowed? Does the areas current and future land use map call for multifamily or is this property grandfathered in?

Instead of rehabbing this building the play might be too close on it and then sell the land off for a nice gain to a national multifamily builder. They might can put a couple hundred brand new units on the property if zoning allows. 40 years ago zoning density was low. Today taking sprawled out properties with extra land ind desirable areas leads to value plays.

Mike Dymski · Answer

Validate using your own numbers.  If $128k is conservative and real, it's a home run.  That's rents at $950+ per unit at only $40k door price.

Tab Teehee · Answer

I guess your referring to the 50% rule?

Im not sure what numbers my bank is going to want to see? I’ve got cash reserves if needed and they’re giving me 80% 20 yr with a credit line of sorts for the rehab.

Henri Meli · Answer

@Tab Teehee Thanks for the clarification. I didn't realize it was in OK. $699/m for 1BR1BA in OK is a little surprising to me. Must be a great location. Sounds like a mid size FL city type rents.

Anyway ...  $4867/month x 12 = roughly 60k per year. I think this is more realistic. I would always add vacancy and legal costs. Especially if B/C areas (just because of tenant base). Another reason why you always want to add utility cost is because, if a unit becomes vacant, you need to keep electricity running under the business name for showings to prospective tenants. In a lot of cities, transfer of ownership in itself ... is  a costly process. Small things like this eat into your cashflow. I would also add costs for making units ready, when someone moves out and you need to clean it up for the new tenant.

As a general rule of thumb, I would never assume the expenses lower than 50% of income.

Tab Teehee · Answer

Mike, I’m definitely aiming for less than $40k per door, probably closer to $35k. So what is a number, ratio, multiplier, etc., that the average Multifamily investor is looking for?

Tab Teehee · Answer

I did realize we don’t have electricity for common areas, so I would add $100 per month there

Tab Teehee · Answer

Henri,

Just wanted to share the numbers we’re working with...

Payroll $1266

Admin $117

Management $1200

Trash $150

Taxes $359

Insurance $450

Maintenance $850

Lawn/pest $400

Marketing/retention $75

For a monthly total of $4867

Do these number seem realistic to

You? The property is in Oklahoma which is probably less expensive O/M costs than Florida.

Henri Meli · Answer

@Tab Teehee . Please look at your numbers again. If your NOI is 128k and your income peaks at 186k ( $700 1BR1BA and $900 2BR1BA) and with a very low vacancy rate, all your expenses combined should run around $55k to meet the NOI given to you by the PM. I find it very low.

I don't have your numbers, but a quick estimate based on experience gives me the following.

PM should take you minimum 8-10% (adding costs to fill vacancies=18k), Taxes(20k?), Insurance (should be pretty high in Florida=$15k?), a minimum of common area electricity/water($1k),, legal (evictions $1k), Trash collection ($4k) and other admin costs/others ($5k). 5% vacancy ($9k)

I have removed all repair and capex, since none should be expected after all the work.

I would conservatively plan for 65-80k for operating the place alone.

I would consider @Joel Owens idea . If the place is attractive and you could sell it to a developer.

Tab Teehee · Answer

Hey Joel, thanks for the interesting idea...but at the sake of appearing clueless, what’s “value play” ?

Great value add or money pit?

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