Multi-family Analysis Questions in Cincinnati

[Walter Hammond]

I am looking at a4 family in Bondhill (neighborhood of Cincinnati, OH). The neighborhood is NOT very good. Not dangerous, but not desirable. Both building are owned free and clear. There are close restaurants and expressway access. Grocery would require resident to go to close by neighborhood, no more than 10 min away.

Asking Price: $80,000

2BDR - Renting $425 (he's doing basic trash takeout and other small task)
2BDR - Renting $500
2BDR - Renting $500
2BDR - Vacant

Poorly mismanaged. A 2 car garage and a single garage that are NOT being used at all. They have laundry. The 2 garage doors needs to be replaced and an automatic lifter installed

All the apartments need to be repainted, just cracks and bad cosmetic look. All 4 kitchens need new counters and cabinets. The carpet isn't bad in some, but I THINK it'll go along way to make the apartments a LOT more appealing.

I'm a bit concerned that all the closets in the units are pretty small, but not sure if that's a big turn off or not. The building is approximate 58 years old. They seem to have the original windows. I mention this because tenants have separate electric, but all are on 1 boiler and 1 water heater (80 gallon). Which the owner is responsible for paying.

Assumptions: The heat is higher because of the old windows. There are approximately 36-40 windows (I'm sure I missed a few in my quick count).

Question: Should these be replaced? (in my area I believe I can have them done on avg $200 a piece)

Assumption: Nicer carpet should lead to a better look to the units.

Question: Should I replace the carpet or maybe only in the vacant unit?

The kitchens are just a simple L shaped counter top roughly 58" x 106. With underneath cabinets and overhead hanging cabinets on the long side.

What is a good estimate on the replacement value of these cabinets (hopefully I can get a deal, since I'm planning on replacing all 4 kitchen counter tops & cabinets). I don't HAVE to do all at the same time since the other 3 units are currently rented.

CONCERNS:
1. The boiler is the original. Realtor says it's maintenance yearly, but I'd like proof of that. This going out could be a big expense.

2. Windows - original old windows, higher heat cost

3. Closets - they are all small, may be a hard sell for today's clientele

OPPORTUNITIES:

Below market rent. By improving the quality of apartments and applying the deferred maintenance that this building has been lacking, I should be able to get market rent close or at $525-$550 a month.

There was a half-done converted apartment in the basement. By adding washer/dryer connections there and putting in coin laundry, I will garner a new income for the building.

Lastly, by reclaiming the garage space, I can charge an extra $25/month parking fee for the 3 garage spaces.

Can any one give any advice on my thoughts/assumptions as well as opportunities? What do you think the cost of the kitchen updates would be? What about the cost to put in 2 or 3 washer/dryer hookups in the failed apartment conversion? There is a rough in already installed. The apartments aren't much more than $650 sqft each so what about carpet cost per unit?

Ok, I THINK those are all my questions...sorry for the long read.

[David Beard]

Walter Hammond - Hi, Walter, I actually have some multi's in Bond Hill.

The buildling is overpriced for the area, particularly with out-dated units and old windows. Probably worth 45K given all the work. You need to try and educate this older seller on actual prices that things are selling for in the area. Sometimes it's tough with these type of sellers. You'd be spending some pretty good money there to modernize and update the property. You can also lay out the rehab numbers for the seller, FWIW.

As far as your expense numbers:

Gas/Electric - this looks about right for 4 2BR units with owner-paid gas boiler heat.

Water - you've got a bad number. Water/sewer will be $45-55/unit/mth. Since water is paid quarterly, I suspect you have 3 mths reflected in your number.

Insurance - this should be much lower, under $1,000/yr

Taxes - you should have no trouble appealing this down to your purchase price. So if you got it for $50K, the annual taxes would be about 2.5% of that.

Maintenance - you are very low here. $350/unit/year might be OK for just replacement reserves (mechanicals, flat roof, etc.). Then there are work-order items and pest control that pop up. The old boiler, old electric service, and plumbing issues will be key. Do as much as possible to overhaul the plumbing and make it durable for this tenant class. And what about turnover expenses (paint, clean carpet, clean unit, various fix-it items)? This can be time consuming if you're planning to do it yourself. Really, you should probably just drop in 15% for maint and move on. Even if you're going to mow grass and be your own handyman, you have to buy the building assuming that you will farm all these things out, since circumstances change and a future buyer of your property may not want to do all this work himself.

Property management - kind of like maint, even if you're self-managing you should factor in about 12% for PM and leasing fees, as a contingency, and since a future buyer will likely factor this in to their computations.

When all is said and done, since you're paying for heat and water, I'd buy the building assuming that 60-65% of the gross income will be consumed by vacancy/expenses over time. If you get it updated to decent condition, you should be able to get $550, or as much as $625 w/ Section 8.

Also, I assume you have hardwood floors under the carpet in this area. If true, get rid of the carpet and refinish the floors for about 1.70/SF.