What Should I Do?

Question

Hi, guys. I've been lurking, mostly, and keeping my eyes open for possible opportunities in my area. I have recently begun speaking with a friend who is also interested in real estate. He has more capital readily available than I do, and this has, as a result, made me more cautious with my analysis of potential "deals".

I've located one that I'd like some help on. The property seems like a really good deal, but at the present time we aren't really prepared to make a move. We don't have an LLC or anything established yet. Further, I (personally) am not in a position to invest, really. He has a good amount of cash to invest, and could probably do this deal on his own. We've talked about the property a bit and I've shown him several different analysis-es I've done of the property. I'd like all of your opinions on it.

Additionally, I think it should be noted that neither of us have any property management/real estate experience and this is a 3 building, 9 unit property. (3 buildings, 3 unit per building, 2 bed / 1 bath each).

This is my analysis.

I want to also note that only 8 of the apartments are available. I spoke to the Realtor briefly on the phone and he said the 9th unit needs rehabbed before it can be rented. The analysis includes $10,000 for that, and other assorted touch-ups for the buildings. Based on all of the photos I've seen and information the Realtor had everything else appears to be in good order. Slightly dated (style wise), but fine for the area the apartments are in. The rent is $395 per month, which is a little low for the area, and all 8 of the units are currently rented. We'd plan on upping that to $425 (which, for the purposes of the above analysis would result in cash flow of $1121.47 per month) which is just under market rent for the area.

Essentially, my question boils down to... Should I encourage my friend to make this investment happen, even if it is without me (or for a small share of it in exchange for assisting him, finding it, managing, etc.) or just wait for a couple of months until I'm in a position to invest my half of cost but risk losing the property?

Eric Schaaf · Answer

I'm sorry, I thought the link to my analysis would have provided enough information on the numbers for people to offer some advice. Is the link not working or was it not detailed enough?

Eric Schaaf · Answer

Thank you very much for your insights!

1. Yes, the current set up is that the tenants pay for all their own utilities, including water. The owner only pays for trash.

2. I reworked that, and added in 10% of the monthly rent for a fee. Is that an appropriate amount? I'm not actually sure what that should be.

3. I've adjusted this to your current numbers, the math has been updated below.

4. Again, I updated that with an assortment of misc fees until I came up with $62,000 for total cash needed to acquire.

5. That's something I feel fairly confident in, actually. There's a pretty large demand in my area and the building is around 25 years old. I think that the value I set should cover it, at least, I assume. Again, no experience so I'll differ to you.

I had considered calling the realtor and asking for that information, but I didn't want to waste their time until I felt more comfortable with the numbers and had a serious talk with my partner about possibly moving forward on the property.

Updated Numbers.

Monthly Income:$3,555.00

Monthly Expenses:$2,930.03

Monthly Cashflow:$624.97

Pro Forma Cap Rate:9.19%

NOI:$17,300.00

Total Cash Needed:$64,500.00

Cash on Cash ROI:11.63%

Purchase Cap Rate:10.48%

That's with keeping the $395 rent. If I update it to the $425 that is just under market for the area it works out to the following...

Monthly Income:$3,825.00

Monthly Expenses:$3,024.53

Monthly Cashflow:$800.47

Pro Forma Cap Rate:10.42%

NOI:$19,406.00

Total Cash Needed:$62,500.00

Cash on Cash ROI:15.37%

Purchase Cap Rate:11.76%

Chris Washington · Answer

@Eric Schaaf

Couple of quick observations:

1. Are all utilities x-Garbage paid by tenants?

2. No management expense in your numbers. Understood you may want to self manage, but I always underwrite management expense in my properties for 2 reasons: 1) you never know when life may change and you will want/need to hire professional management and 2) You should be compensated for your time and energy if you self manage. If the deal only pays out without any management fees, you may be surprised at how much you are getting "paid" for managing the property if you calculate the amount of return you make divided by the numbers of hours you put into managing the property.

3. Since this is a commercial property, you likely will not receive a 30yr mortgage and will need a higher down payment. I am underwriting now with a 25% down and 20 yr AM, 5% interest.

4. I do not see enough closing costs in your "Total Cash Needed" figure. Based on quick math of a $160k purchase price at 25% down, I'm coming up with $62k needed to acquire (including inspection costs, prepaid insurance, contingency account, etc.), not including your $10k for renovations. Not capturing all your costs to acquire would over-inflate your CoC return projection.

5. Without knowing your specific area, its hard to comment on your calculations for vacancy, maintenance, taxes, etc. I would just recommend that you review these to ensure they are in line with the Class of asset and class of area (i.e. if this is a class C property in a class C area, you will want to probably over estimate your maintenance costs due to age of property and include a bad debt factor for any lost/missed rent payments).

Finally, since you say all these expenses are estimates I would highly recommend having your realtor get a T-12, Rent Roll, and P&L from the current owner. You should ultimately calculate all your figures and purchase price based on actual performance of the asset in the last 12 months.

Hope this helps...best of luck!

Eric Schaaf · Answer

Well then here are some stats from the analysis I did on it.

Monthly Income:$3,555.00

Monthly Expenses:$2,636.03

Monthly Cashflow:$918.97

Pro Forma Cap Rate:12.15%

NOI:$21,566.00

Total Cash Needed:$45,500.00

Cash on Cash ROI:24.24%

Purchase Cap Rate:13.07%

As I stated in the first post, this assumes rent of 395/month. We are fairly certain we'd want to raise that to 425/month which would result in a cash flow of 1114.70/month.

Vacancy:

$177.75

Repairs:

$355.50

CapEx:

$355.50

Garbage:

$250.00

Insurance:

$450.00

P&I:

$878.20

Property Taxes:

$169.08

That's the break-down of the "estimated" expenses. I'd like to reiterate that I have no experience managing apartments and real estate so my numbers could be wildly incorrect (hence why I am asking for some help haha).

And these are this is the financing information. I just chose 7% interest, because it seemed like the high end of what I'd be likely to get, though I certainly hope it is lower! I just wanted to make sure all my numbers were conservative.

Down Payment:

$33,000.00

Loan Amount:

$132,000.00

Loan Points:

$0.00

Loan Fees:

Amortized Over:

30 years

Loan Interest Rate:

7.000%

Monthly P&I:

$878.20

Chris Washington · Answer

@Eric Schaaf More than happy to take a look and provide my opinion, but your link did not work for me either, so to Greg's point not really able to help based on the information in your OP

Jason Hirko · Answer

the link didn't work for me... But as for not having an LLC set up yet, it takes like 4 minutes to apply and the state can usually turn it around in a day or two. Don't let stuff like that be an excuse or you'll never move forward

Thomas S. · Answer

You have not included enough detailed information on the specific numbers for anyone to give any reliable feed back. We have no information on your ability to determine the cash flow of a property and can not give advice based on sketchy information. Details are what make a deal good or bad not simply one number.

It's like asking for advice on a used car based only on the colour.