Multi-Family Improvement Question

[Gaurav Bhasin]

Dear BiggerPockets members, 

I am currently in the process of purchasing a 12-unit Multifamily property in Killeen, TX. The current rents are $395 per unit (2/1) which comes out to $4800 a month or $57600. The expenses for the property are currently $54000. I'm purchasing the property for $325,000 with 20% down and remaining from hard money lender. I'm willing to jump in during my first year of investing. 

So the current cap rate would be:

$57,600 - $54,000/$325,000 = 1% Cap Rate

Now I looked at the expenses and I believe the property management company isn't doing a great job. I view this as a value add property and hope to be able to do the BRRRR strategy. I also have another property close to this one that is renting for $650 for (2/1). I am hoping that at the very least I increase the rents to $600 and decrease the expenses to Tax/Insurance and misc repairs. I ran the numbers using the Bigger Pockets calculator and going through the wholesaler (fees) and hard money lender (fees), I still could be at a 12% Cash on Cash ROI with increase of rent and decreasing expenses. I do plan on making one time improvements to all the properties. The problem I am having is figuring out what the new value would be since its a commercial property. Lets take for example I do get it to $600 a unit or $7200 a month or $86400 for the year. Lets assume I get the expenses down to $30 K. How could I guesstimate the new value? I am looking to go back to a lender after 1 year. So my equation has the new NOI which is $86400 - $30,000 = $56400, but not sure about the value and cap rate in this equation.

Hope it makes sense.

Thanks,
Gaurav

[Pete Harper]

You really need to pay attention to location in the Killeen market. I own property in Killeen and have looked at many others before purchasing. I’m guessing by the $395 rent for a 2/1 you are in one of the rougher areas. There was another out of state investor who posted not long ago. He was having difficulty renting units for below market despite investing in B+ class upgrades.   looking at the location he was in the middle of the highest crime zones in Killeen. Trulia crime maps can be helpful in avoiding the rougher neighborhoods. 
$650 for a 2/1 is aggressive in Killeen. I’m getting $650 for freshly renovated 2/1.5 townhouse in one nicer neighborhoods. Before reno they were going for $590.  I see a lot of 2/1 renting for $450-500 in lesser neighborhoods.