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Updated over 3 years ago,

User Stats

48
Posts
22
Votes
Chris Muller
  • Rental Property Investor
  • kelowna, bc
22
Votes |
48
Posts

Deal Analysis - opinions from experienced commercial investors

Chris Muller
  • Rental Property Investor
  • kelowna, bc
Posted

Hey there,

I have, to date, been a residential buy/hold investor with 2-3 units properties.  I have sourced an off market deal and am in negotiations with the vendor.  Before taking anything to the next level, I have been taking time to do my due diligence in regards to the market, property etc.  Part of this has been connecting with local real estate/property management professionals that I know and use in the area, but also wanted to reach out to the community here for opinions/insight.

Please note - I am located in the Shuswap/Okanagan region of British Columbia, Canada.

The property and area:

0.75 acre L-shaped lot in a smaller community located about 1-1.5 hours from 2 larger cities (Kelowna & Kamloops).  15 minutes from a reasonable sized town (Salmon Arm), this community (Sicamous) is only about 3000 full time residents.  That being said, our entire region has an extremely low vacanacy rate (has for years) and these communities, which I have been invested in for awhile now, have a strong tenant base.  Partially due to earning income vs. property prices and being a desirable area to live in.

The property had a commercial building that has been converted in 3 residential units and the back of the property has 6 additional units (5 buildings - 1 is a small duplex, the rest are detached 1-2 bed homes).  There are (2) 3 bed units, (4) 2 bed units and (3) 1 bed units.

Rent ranges are as follows:

  • 1 bed units - $750-$1100   (used $850)
  • 2 bed units - $1000-$1500 (used $1000)
  • 3 bed units - $1200-$1800 (used $1200)

A decent amount of improvements have been done over the years include (fairly recently) new roofs, city sewer and water upgrades, paving, 4 units have been renovated.

Numbers/Analysis:

Currently one unit is vacant and the rest of the units are substantially under market rents - 60-70% of market rents.  This was confirmed by polling renters in the area, rental listings, property managers and other investors in the area.

Current numbers (from previous listing/current owner):

  • Purchase Price: $715,000
  • Gross rents: $60,000
  • Vacancy (3%): $1,800
  • Effective Gross Rents
  • Expenses
  • Property Tax:                                    $7,000
  • Insurance:                                         $4,500
  • Waste removal:                                 $3,000
  • Snow removal:                                   $1,200
  • Maintenance:                                   `$4,800
  • Utilities (Common area, laundry etc): $3,800
  • Water & Sewer                                  $5,800
  • Property Mgmt (8%):                          $4,800

NOI: $23,300

Numbers once property has been updated and brought up to market rents - rents are based on mid-low end of the rental range.

  • Purchase Price: $715,000
  • Gross rents: $105,000
  • Vacancy (5%): $5,250
  • Effective Gross Rents
  • Expenses
  • Property Tax: $7,000
  • Insurance: $4,500
  • Waste removal: $3,000
  • Snow removal: $1,200
  • Maintenance: `$5,250
  • Utilities (Common area, laundry etc): $3,800
  • Water & Sewer $5,800
  • Property Mgmt (8%): $8,400

NOI: $60,800

Closing Costs:

  • Inspection $2,500
  • Appraisal $2,000
  • Environmental Study $2,500
  • Land Transfer Fees $12,000
  • Lender Fees $10,000
  • Legal Fees $4,000
  • Lender Fees $7,000

Total $40,000

Renovation work: 

Units need cosmetic work, some electrical, and BB heaters replaced with mini-splits.  Anticipating $15-20k per unit.  Timeline of 4-6 months to have the work completed with team of trades I use and re-rent.

Financing:

Current owner is will to take back 85% at 0% for 12 months and potential to negotiate better terms still.

Possession:  

Owner has noted that he will provide vacant possession.  This would be noted in the contract and allow the closing date to move accordingly and removing any liability on my end from how he deals with his tenants (any costs/claims through the tenancy board would be deducted from the amount owing on the property, as a worst case scenario).

Now for the questions:

  • 1. Am I overlooking anything in regards to numbers analysis?  
  • It is a bit of an odd-ball property with not being a conventional apartment building, but aside from that there is a good opportunity to really improve the NOI and refinance (essentially BRRRR the property to a comfortable amount of leverage).
  • 2. The deal as a whole and the plan/execution - what am I missing?
  • 3. What challenges could I expect with financing?
  • I have sourced a companies to provide a phase 1 environmental study, inspection etc. The commercial broker I work with has noted that it would be wise to assume 3.5-4%, 25 years and a 65% LTV from a lender.
  • Any constructive criticism, advice, etc is welcome.  I'd rather have someone address issues in the property and plan now, then after I own the property.

Thanks in advance and always appreciate the wealth of experience in this community.

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