My first deal...need help figuring out how to analyze...Need feedback

[Nichole Wall]

Ok BP friends...I've spent quite some time analyzing this deal. I still have some due diligence to do like go out and take a contractor on the property to see if it needs any fixing up. First question to that...should I be doing that before or after I lock up the deal?? 

Ok, let me get into the analysis of it...this is a 6 Unit Multifamily Building. There are 5- 1 bedrooms and 1 studio apartment. The rents are as followed: $680,$500, $650, $675, $675, $650. Which totals $3,830/month rental and $45,960/year

EXPENSES a year

taxes:             4,189

garbage:            182

sewer/h2o      1,200

electric/heat 10,000

ins                  1,002

mgmt             4,596

=                  21,169 a year

Gross income:        45,960

                           -   21,169

                           =  24,790 a year

He's asking 119,000 for the place however he's really motivated to sell. He said, "You'd be surprised what I would take for it." He said he's willing to consider any and all offers. Which I'm guessing I have some negotiating power here. It needs a roof and siding and the chimney fixed on the outside (~$12,000). I haven't been inside to check it out yet. That's next. He says it's sound though. He's not willing to do a seller financing on it. I think he just wants the cash to buy some other investments near him. He also said he knows a lender that will figure it repair costs in which his money will sit into escrow until the repairs are done on the place. Repairs will be fixed with his money right after closing. I just have to get an estimate from a contractor and his money stays in escrow until it's fixed. 

The reason why he's selling is he had a trusted property management company taking care of this place but the owner died in the summer and now 3 of the 6 units are vacant and he knew them personally so he knew his place was being taken care of. Now it's not up to his standards and he's in NYC and said he could sell this place and get two in the city and oversee them himself.  

There is a mentally unstable lady in one of them which he said she can go if I wanted. She's been there 10 years and someone pays her rent for her He also said her apartment is atrocious. (Yay). She does have her own entrance so she doesn't bother anyone. So that would leave it down to 2 rented and 5 vacant when purchased if I wanted her gone. 

All of the units are on one electric and one heating. I don't think I can or would switch the heating over. However, I'm wondering if I can for the electric. 

I have a couple options for financing here:

I could get a loan and have a partner put a down payment.

I could offer cash in which we figured we have (with the partner) $37,000 (which is really low I know, but hey you never know!)

or I could do the lender that does the fixing of the property but I haven't figured out how to run the numbers on that one yet.

All I know is I will be offering lower, I'm just not sure yet. 

Ideas on this place? Anything I'm missing? Please let me know! Thanks! 

[Roy N.]

@Nichole Wall 

With just a few back of the envelope scratches - not a full discounted cash-flow analysis, a few things pop out:

1) Vacancy allowance (vacancy is presently 50%) - what is the average vacancy for the area?  If you do not know, use 10% ... but in your case, I'd use higher since the building is half empty at purchase.

2) maintenance allowance / CAPEx set aside - allow at least 10% for this as a minimum.  In your case if the roof it due, have it quoted and give the Vendor the option of replacing it or crediting the costs of the purchase price.

3) PM ... 10% is typical ... yours seems slightly high ... but you may have calculated it from scheduled rent rather than actual revenue.  With 50% of the units vacant, the PM fees should be far lower.

4) Snow and lawn care.  I know it snows in NY and you likely have grass growing once the snow is gone ... better budget for it.  I put 1500/yr in my calculations.

5) Your utilities seem high for a six unit.  I see you have bundled electricity and heat.  Does the building have a common boiler?  Is it fired with NG, oil or electricity?  Are the units individually metered?  Is the Vendor carrying utilities for any of the units?

Assuming you have the building full at your scheduled rent w/ a 10% vacancy allowance; using your expenses with the following changes: 10% maintenance; 10% PM; 1500/yr for landscaping and snow, I get annual operating expenses of ~26,500, leaving you an NOI of just under $15K.

I made the assumption that you would finance at 75% LTV @5.5% w/ a 30yr amortization. I also assumed your opportunity costs to be ~8% {always like to set my assumptions on the high side}.

I also added $15K to as renovations to be performed at time of purchase ... to cover the roof and any other bits.  I also did my calculations at the ask price of 119K.

With all the above, the property should yield an ROI between 11 & 12% and a CoC between 18 & 19% with good a strong debt coverage ratio (2.4) and a Break Even Ratio of 71%.

The biggest negative I see is the operating expenses are pushing 64% of gross revenue ... most of this is your $10,000 utilities bill.  If you can have a plan to improve upon those costs - putting utilities in the hands of tenants; replacing the existing heating system with a newer more efficient solution or making improvement to the building envelope (windows, insulation, etc) and pull them down below 60%, you have a good long term cash cow here.

Now:  If I were modelling this building for purchase, I would take a much more dire set of assumptions (20% vacancy, 15% maintenance & CAPEx, 10% PM) and assume I need to spend 30K right out of the gate to fix things.  I would also assume that expenses would grow by 1.5%/year, that appreciation would be negative (depreciation) .. say -1% and that there would be no improvement in rents.   

Just for fun, I did this. The building would still survive in this fictitious dire world ... but would not be the best use of your capital if the opportunity cost is 8% -; The ROI would be only 4%, the CoC 5.5%, but your debt coverage would still be 1.55 (good) and the Break even ration 72%. Your operating expense ratio would be 74%, but you would still be able to make debt service requirements (for the first couple of years).