How would you buy this?

Question

I don’t have available capital right now, but I really want to buy two 4-piexes (one transaction) in my area.  I’d love any advice or strategies that can be offered.

List price: 1.250

Sf 8,792

Tax 8052

Gross scheduled income 86400

Insurance 1416

Water/sewer/garbage 2004

Electric 6912

Other 876

Total expenses 19260

Net operating income 67140

(These numbers look kinda pro forma to me)

Units are 2bed 1 bath 1025 sf

Central, coin operated laundry.

All units are rented for 900.

According to rentometer, average rent for would be 1400 for 2 bed, 1600 for 3 bed. (Will confirm that with property management on Tuesday)

According to the assessor, the last loa out on this place was in 2005 for 201,100.  I imagine that it might be paid off by now.

I realize that many of you would say don’t do it, but for my area, this is a good deal.

My first thought is to try an owner financing situation, but I don’t have any cash right now for a down payment.  This leaves me unsure of how to proceed.

C’mon BP, don’t disappoint.  Give me hour best ideas for this one!

Anthony Dooley · Answer

The problem with a 5% cap rate deal is that interest rates on your loan will be 5.75%, which means that your property will have a negative cash flow based in the NOI stated above. The only way I would do it is if the owner will finance it with no money down for a percentage of the effective monthly rent for 5 years. At the end of 5 years, seek to refinance with a commercial loan. During the 5 years, you would need to increase rents and other income streams from the property to increase it's actual value.

Robert Freeborn · Answer

@Robert Schumacher Great thoughts here.

At current rent, it doesn't cash flow with 100% financing, at least not conventionally.  Would have to do owner financing to make that work at a low interest.

My current capital is tied up in 3 other deals.  One is scheduled to close next month.  The second is wrapping up right now and should be listed by the end of the month (just had a tile issue that set us back a week.) My third deal is a limited partnership on another flip that should be listed by the end of the month as well. So I have capital, just no access right now, which is why I'm trying to find a way to make this work without.

Once I get the property my plan would be to renovate as the units turn (non-renewing as needed).  I would spend about 10k each unit.  Rouged vinyl plank floors for longevity, appliance updates, limited drywall and paint repair, etc.  I'm a GC so I can do the work myself to save on costs.

I would also look at reducing the expenses to increase the NOI.  Based on the average rents and looking at the last units that sold, all at around a 5.5 cap, I could increase rents to 1200-1300 easily.  I think I can do 1400, but will be checking with local property management on that on Tuesday.  If I only increased the rent I could sell it at a 6 cap for 1,759,000.  That would be about a 300-350k profit once rehab, loan costs, and selling costs clear.

If I hold it, using a lender that allows for interest only rental loans, I'd cash flow about 3k a month.  Using a conventional loan, that would drop to about 1500.  That is assuming I buy at listing price.

There is no rent control in the area.

Robert Schumacher · Answer

@Robert Freeborn

What are CAP rates in the area?

Does it CF with 100% financing?

How much would you need to update all 8 units?

My concern is your lack of capital. Personally, I would be looking to see if the numbers allowed you to update all 8 units, bring rents up to market & then finance it to get your capital out but only to the extent of the property is still cash flowing.

If it doesn’t CF but you can raise the value, sell it and you will have capital for your next venture. Make sure you run all your numbers.

Do you have Rent control in your area preventing you from raising rents?

Robert Freeborn · Answer

@Charles Ngansop

Some great thoughts here.

How do I know it’s a good deal for the area? Because I’ve been looking at multi family in my area for over a year.  I’ve run the comps and crunched the numbers.

What’s my exit plan? Either long term hold and cash flow or rehab as each unit turns over and increase to market rent and resell at a 6 cap. (Market rent is 1400 per unit.  Selling at a 6 cap at the current expenses comes out to 1.9m. 7 cap would be 1.66m. )

The properties are on adjacent lots, but conjoined together and sold as one. So you raise an interesting idea on if I could finance each individually.

I would respond more to your post, but I’m typing on the app and it isn’t showing me the rest of your post, so I’ve had to go from memory )

Charles Ngansop · Answer

My suggestion would be this:

Do not invest until you learn how to do it, unless, hope and speculation are your investment leitmotiv. I know this may song deceptive, but unfortunately it’s a good advice.

Now, assuming that you know what you’re doing:

What would be your exit strategy on this deal, should you buy it? What’s your plan? People buy multifamily for different kinds of. reasons. It’s important to have that reason upfront. Then, only then someone would come up with a strong recommendation on how you could go about the transaction.

You said this: “I realize that many of you would say don’t do it, but for my area, this is a good deal.”

Question: How do you know?

A fourplex must be analyzed in two ways:

• 1/As a residential (Check for comparable in the area just as you would do with single family)
• 2/As commercial (Use the income approach)

Then make your offer based on the lowest number of the two.

If the two fourplexes sit on the same parcel with the same tax id# (that would legitimize the 8 unit consideration), they must be analyzed as commercial. If not, use the comparable approach for each 4 plex.

Preformat is typical for hope and speculation. You must buy on today’s NOI not on something that you hope for.

Ann Lamm · Answer

@Robert Freeborn

Yes

Robert Freeborn · Answer

@Anthony Dooley

Ooooh! Master lease is a great idea!

Anthony Dooley · Answer

Based on your numbers, I don't think it would appraise for $1,250,000 today. But, you can offer him his full asking price if he will sell it to you on your terms. You would work for free until you were able to increase the rents etc. Your offer should be contingent on appraisal and the ability to get suitable financing. If you manage it for 5 years, you will learn what all of the problems are with the property. Also learn about a master lease. Maybe offer to do that.

Robert Freeborn · Answer

@Parker Eberhard

It definitely has my attention!

Robert Freeborn · Answer

@Anthony Dooley

Great advice.  I was thinking something similar.  I see some large upsides to the rent, so I think it’s possible.

How would you buy this?

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