Would like some feedback on a multi-family....

Question

A group of 5 duplexes each side 2 bed/1bath on a crawl space.  Has a laundry facility with 4 washer/4 dryers in a separate building.  Each building has a well/septic (I live in a rural community so this is common) that is shared by the tenants.  Taxes are $5,600 per year and seller claims $3,000 in maintenance last year.  Built in 1985 with new roofs in 2008.  Owner pays trash service. Currently fully leased at $530 per month (on high side of average for my area) and near a newly completed and desirable grade school which feeds into the "better" middle school.  Sits on 2.5 acres and is rural on a private drive.  Tenants pay their own gas/electric and water heaters and furnaces are gas. I haven't yet scheduled a tour but would like the BP communities thoughts on valuation.

Ginger C. · Answer

Thank you, this is more what I was looking for.  My ENTIRE area would be considered 'rural' by most standards although our "city" is 10k, with another 10k in the "subdivisions" and the balance of the 10k in our county spread throughout the truly rural areas.  I was coming in at around 300k as a good cashflow price on this property and the list price is 499.

Roy N. · Answer

Ginger:

Were you looking for opinions to support your emotional attachment to the property or an experienced third-person view of the deal (which in this medium usually means the numbers)?

To analyse the deal, the numbers presented are a little skinny.  You have 10 2bd, 1bath units with on-site laundry spread across six buildings.

Scheduled Rent: 530/unit x 10 = 5300/month = 63,600/year

Vacancy:  10%, but where this is rural, I would personally use 12-15%.  In a rural setting tenants will stay longer (due to lack of options), but vacancies will take longer to fill as well.  So we have $530 - $795/mth vacancy allowance

Gross rent:   $4770/mth (57,240/annum) to 4505/mth (54,060/annum)

Expenses:

Taxes:            $5600/annum

Insurance:    ???? {where it is rural, and six structures, I would expect this to be high}

Maintenance (10%):  5724 to 5406/annum

Electric(House):

Gas (House):

Water/sewer (septic service):

Trash ($100/mth):

Landscaping/snow removal:

Total (assume 50%):   28,620 to 27,030

Taking the average, we have NOI of ~27,825/annum.

There is a good chance the actual expenses, once you have the numbers, will come out lower ... maybe as low as 23-25K/year.  I would allocate the balance to CAPEx / reserves.

If this were a single building with 10 2bdrm units, I might be content with a CAP of 9, but where it is spread across six buildings, I'd be looking for an absolute minimum of 10 {deferred maintenance would need to be minimal), but more comfortable with 12-15%.

Given that, I'd be looking for a price <280K ... preferably between 230 & 250K ... the big caveat here is I do not know your area.

Ginger C. · Answer

All I was really looking for from BP is some ballpark figures.  I've eyed this piece of property for over a decade so have some "emotions" tied up in the evaluation.  Cap rates seem to run 9%+- in my area and I would like to see $100 net cash to me per door which is not doable at the 'asking price' and the price I arrive at is substantially lower than the asking price.  I'm going to be having my realtor schedule a walk through later this week and then will have more complete financial information with which to evaluate this deal.  Its right behind my self-storage facility and convenient for me to operate.  I too value cash flow much higher than appreciation and am evaluating the complex on a cash flow basis as I intend to hold it for many years to come.

Bill Jacobsen · Answer

First of all, each investor needs to know their required rate of return.  For me it is different depending on whether I am going to flip the property or buy and hold.  The return on a buy and hold is going to be made up of cash flow + appreciation.  I value cash flow higher than appreciation.

It is helpful to know CAP rates in the area.  I found what I thought was a property with a high cap rate in Florida to only discover that there were a lot of properties with that cap rate.

If I don't see a property before I buy I at least have a inspection and a contractor to give a bid on cost of repairs so I know the total investment going in.

We normally expect expenses to be 40%-60% of gross rents but it is good to estimate the cost of the various categories as much as possible.

Good luck.  Hope their is something of value to you in what I said.

Bill

Ginger C. · Answer

What additional information would you need?

Bill Jacobsen · Answer

We do not know enough about the property or your area to value your property.  Only you can do that.  If you can't, don't buy.

I will throw out a number of $300,000 to -$375,000 less discovered deferred maintenance.

Good luck.

Bill