I would LOVE an experienced investor's opinion

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I would LOVE an experienced investor's opinion

Meghan McCallum
Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes

Hello BP,

I was presented an offer today that I walked into without warning. While introducing myself to some local commercial real estate agents I mentioned to the oldest member that I was really interested in an opportunity for a 20 something multi unit property with seller financing. A little bit about me...I have a sizable amount of cash, but what I'm learning from this site is that its better to use less cash to score deals if you can. After talking to the team about what I was looking for he came back to me and said that he had actually been looking to sell his property and that he would finance it. Here are the numbers:

27 Unit Mixed property

                                             #        /ea         /m total

Efficiency Units    10 @  $410    $4100

1 Beds                 11 @  $480    $5280

Loft Efficiency      2  @   $600    $1200

storefronts 1             @  $900    $900

                   2            @  $300    $300

                   3            @  $500    $500

                   4            @  $800    $800

        Laundry            @  $370     $370

                less vacancy     4%    -538

                                 Monthly      $12,912

                                   Yearly       $154,944

Yearly expenses 42%   (-64,907)

Net Yearly income   $90,037

What price would you pay for this property?  Would you pay more because it is seller financed?

I'm going to sit down and read more into this, study local rental rate a little harder, but in the meanwhile...an opinions?

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Nick B.
Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
10y

Increase the vacancy to 12%, increase expenses to greater of 55-60% of gross rents or $4700 per unit (more or less depending on what similar properties are spending per unit). Calculate NOI and apply whatever cap rate is usual for this type of property. That's your max. offer price.

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  • Kyle Penland
    Investor · Dyersburg, TN · Member since 2015 · 320 posts · 100 votes
    10y
    I can't say what I would pay because it would take a lot of time. The seller is going to expect you to pay more because he/she is holding the note. Good luck!
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  • Account Closed
    Private Financing Consultant · Honolulu, HI · Member since 2010 · 132 posts · 27 votes
    10y

    Congratulations Meghan for locating a potential purchase!

    There is not enough information here for me to evaluate the deal but I hope you have more details off line or ask the seller for it.

    First is location, is it A, B, C, D neighborhoods? What condition is the building in, is it better than the rest of the neighborhood or is there room for you to upgrade things to make it match the area?

    With the storefronts, is it on a major street where the business tenants get enough exposure and they can keep their business running and paying you rent for a long time?

    Looking at the unit mix, this property has a lot of efficiency and 1 bedroom units. In general, these kind of units have a lot of turnover, tenants may be single and in transition and they don't necessarily stay for a long time. Look into the rental history and see how often tenants move in and out, how long is the turn around time before you can replace new tenants, and what's the normal cost of getting the vacant units market ready.

    How old is the building, is everything in good condition or you will have to replace roof, AC, furnace, boiler, plumbing, electrical, etc. in the near future?

    Does the building have any restrictions with historic renovations, city code, etc?

    Has the owner been self managing the property or using a property management? Are you going to self manage or pay a fee to management company? Calculate that fee into your expenses. 

    Evaluate the owner's expenses and add on anything they may have not counted for, ex. reserve to replace, cost for marketing, accounting, legal fees, etc.

    What is the area cap rate? (Return on investment most investors look for for that type of property.) For example, if it is 10% cap rate, the property will probably go for $900K if the NOI is $90k, but if its 5% cap rate, the seller might expect to get $1.8m.

    Offer whatever amount works for you, because it will be your happiness & or problems to handle once you own the property. 

    Good Luck!

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  • Nick B.
    Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    Increase the vacancy to 12%, increase expenses to greater of 55-60% of gross rents or $4700 per unit (more or less depending on what similar properties are spending per unit). Calculate NOI and apply whatever cap rate is usual for this type of property. That's your max. offer price.

    1Reply
  • Corey Melkonian
    Real Estate Agent · Watertown, MA · Member since 2015 · 366 posts · 77 votes
    10y

    Great information, thank you.

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  • Nazz Wang
    Investor · Maui, HI · Member since 2012 · 232 posts · 96 votes
    10y

    @Meghan McCallum

    Honestly, I think you are better off spending your time and care underwriting the deal yourself. Personally, I almost never take any seller provided numbers to heart unless it is on a tax document. A buyer needs to perform his/her own fact checking and underwriting. For starters, how much would the insurance be? Did you call water company and energy company to get a ball park for your utility expenses? The list goes on.

    Personally, I think rents are too low and there is not enough meat to chew on. No matter how small the apartment, there is always a kitch sink that will leak and a toilet that will overflow. Bedroom and living room areas are relatively very low maintenance, perhaps a cost a paint between tenants or something. The point being, for small cheap units, you have about the same repair cost, so your profit margin is lower to none.

    1Reply
  • Meghan McCallum
    OP
    Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes
    10y

    @Celine F, @Nick B., @NazzWang

    You guys,

    Thank you so much for your time and insight. ALL of you made some great points. I think before I go jumping into this property, or any for that matter, I should feel comfortable with it. This one just doesn't feel right. And after taking your suggestions and running them...its not a good investment. This is all great info to chew on for my next analysis.

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