Oak Lawn Dallas and High Interest Rates

[Sanjoy V.]

Hi there,

I am looking for advice on a current deal in Oak Lawn / Knox / Henderson area Dallas.

This is a small <45 probably class B, Boutique unit, which has been gutted and rebuilt, almost 90% leased in a very short time (although were given 1st month concession to fill the apartments). Almost everything is new, so probably not much upkeep.

Here are some of the questions I need help with:

1. Don't know what the property taxes are going to be? how do I calculate, should it be based on NOI and local cap rate? Will hiring a tax attorney help truly lower tax rate. Will the tax be based on purchase price?

2. Since it is recently leased there may not be much of T12 and expenses history, but since its a new and small property, is it reasonable to take 35% as expenses, instead of typical 50%?

3. What is the going cap in the area? and the rental increase that is expected? is it really going to continue to appreciate and have rental increase, with tons of apartments that are coming up? But most are going to be class A possibly and will be more expensive than a class B type apt and people could step down.

4. Trying to take mortgage amount without having the net worth equal to the loan amount. So I may get a 4.9% interest rate best with 25 year amortization, which will cut into the cash flow, but still may pay off more by 10 years and may even out?

[Nick B.]

#1 - if you want to be conservative, calculate your first year taxes based on 100% of your purchase price. You may get away with 80% and the actual tax value may still be lower that what you paid for the property. However, if the tax value is higher than your projected number, you will have better chance arguing that it should be lowered to at least of what you paid. 

#2 - never use %% of rent to determine expenses. Expenses do not depend on the rents except for PM company fee that is based on the collected rents. If the property is brand new you will have lower R&M and make ready for a while but these numbers will increase over time. So, plan for them up front using similar properties as your guideline and input from your property management company

#3 - Cap rates in Oak Lawn are 4-5% for A-B class and maybe a little higher for C class which is sold as "value add in A-class location". Some people say that Oak Lawn will continue to appreciate but their guess is as good as yours. Don't plan for appreciation when you underwrite. Make sure that the property cash flows as is and have a path to increase rents in the near future.

#4 - Commercial lenders require your net worth to be at least equal to the loan amount AND have 10% post-closing liquidity. I don't think there is a way around it for a first time buyer. You may partner with someone whose net worth together with yours would satisfy your lender. Make sure that partner also has relevant MF experience.