MFH opportunity - 6 unit in Kansas

[Joshua Metherd]

Hi all, 

I've got a potential deal, and I'd like to hear your opinion. I've broken out the information into four sections to help make the post digestible: seller info, property info, financials, my questions to the community.

Seller info

The seller is my uncle

The original asking price was $310k, but he has since lowered it to $275k without my asking

He is motivated to sell. I think he is looking to deleverage.

Real estate investing and property management is his full time job. He probably owns close to 25 to 30 other doors, and he manages those + a few more. He's offered to manage the property for me free for 12 months.

Property info

It's located in a small to middle sized town in Kansas. It seems to be a good rental market given the location next to an Army base. My uncle hasn't had much trouble finding renters in the past.

The property has had a ton of rehab over the last year: new double paned windows, new exterior doors, new A/C and heaters, new plumbing (pex) throughout, new tile flooring throughout, some new electrical (all professionally done and inspected), new bathrooms, new fixtures, 4 of the 6 units have new cabinets, new appliances (stove, refrigerator, no dishwasher), shingled roof (less than 5 years old), new trim added to all the units, new paint both inside and out, had foam insulation added to the attic to help with the heating/cooling as well as protect the new plumbing that they decided to run through the attic, 2 new hot water heaters (each service 3 units), 

No structural or foundation issues, new water line from meter to the building, and not in a floodplain

The lot is quite big (1 acre) and is zoned commercial. There is a potential to build additional rental units (I'd estimate two identical buildings of 6 units each) or something else like storage units, etc.

Financials

Monthly income of $3,620 = $3,570 ($595 rent x 6 units) + ~$50 (coin operated laundry)

  - Currently, 100% occupied without any room to raise rent as it's already near the top of the market

Monthly expenses of $2,299 = $405 (electric) + $70 (gas) + $56 (water/sewer) + $50 (trash) + $250 (taxes, see below) + $273 (insurance, what they currently pay) + $362 (10% property management fee) + $362 (10% capex reserve) + $181 (5% maintenance/repairs) + $290 (8% vacancy, see below)

  - Taxes were $1,332 last year, but that was before all of the remodel so I'm estimating a future tax increase based off of the taxes I saw on other MFHs in the same town.

- Property management: my uncle offered to PM the property for free for 12 months, and then said that it would be 10% of gross rents. I could potentially self manage these units, and pay him an hourly rate if something comes up and I need immediate help at the property. I think up for the challenge of a full time job and managing these out of state units.

- Capex and Maintenance/Repairs: likely won't incur much expense right away given all of the recent rehab, but I'm setting this aside for the future 

- Vacancy: I don't have a good idea of local vacancy rates. I picked 8% as it's around 1/12th of a year, and 1 month total vacancy seemed reasonable to me. 

Monthly NOI of $1,321 - $3,620 - $2,299, annual NOI of $15,852

Cashflow depends on price and financing (questions below)

Questions for the community

Does investing with family scare you?

How would you value this deal?

Does anyone know the average cap rate of small town, central Kansas?

Comps seem very hard to find. A nearby 4 plex (2x1s not 1x1s) is going for $200k (not sold). Haven't found any recent MFH sales of a comparable type, but haven't spent more than 20 minutes on it either. Is this something I should pursue further?

What's your general feedback on the financials of this deal? 

I don't see much appreciation in this property unless I build additional units or somehow make use of the rest of the lot. How (if at all) would you factor that into the value of the deal?

Financing: what is the going rate for a small commercial loan? I looked at some previous posts, and they indicated anywhere from 4%-6%. They looked to be 5/15 balloons with 75%-80% LTV.

A big thanks in advance for your time and comments,

Josh

[Zach Quick]

@Joshua Metherd Is it Fort Riley outside of Manhattan? Just curious of the location. Have you physically seen the property yourself yet?

FWIW I bought a 12 unit in a small Kansas town recently with a 4.9%, 20% down on a 20 year am. I did/do have a previous local relationship with them though so that may be your starting point with a bank on terms.