Deal or No Deal? Milwaukee Mercantile Apts

[David Stover]

Hello BP,

I'm new to REI and running the numbers for my first property. I'd really appreciate experienced investors to take a look at my work and let me know if my assumptions are sound or if I'm completely off base. Also, based on your experiences, does this seem like a wise investment for my REI goals, or am I running headlong into trouble?

Please indulge me for a moment while I introduce myself and describe my understanding of the property:

About me: My goal is to replace my earned income with income from long-term buy-and-hold properties. The niche that interests me most is large MFH, and I'm looking at Milwaukee as my intro market. I currently live and work in SoCal, but I may ultimately move to the Wisconsin/Illinois area (SO's friends and family).

About the property: 7 units (6 Efficiency, 1 2BR) in a 3-Story house on the Upper Easy Side. My research suggests this is a solid B neighborhood, comprised largely of young professionals and UWM students. I rate this property as a C/C-.

The home is very old (Pre-1900) and the photos suggest a property that may be sound mechanically but certainly not finished well or pleasant inside. I believe this is reinforced by the facts that 1) the home has been on the market for a long time, and, 2) the price was recently cut $43K. As such I've assumed $25K repairs will be necessary to force appreciation to market price.

[Ramon Jenkins]

How did you come by arv?

Like interest rate

Maybe consider $50/unit per month for water usage or 10% for vacancy

Rent amount via ?

Especially the 2 bedroom for $900

I typically prefer guage using rentometer, fyi

[David Stover]

Hey Ramon,

First, thanks for your time!

I came by the ARV by looking at Zillow for the value of similarly-equipped homes in the area, then derated the value by 2% as a fudge factor. The city assessed value is ~$235K but I know these can be a bit lower than market value. TBH I don't have a cap rate for the home now, so I can't forecast an ARV cap rate, which makes it hard for me to speculate on the ARV. Is this something a realtor could find for me?

I'll definitely bring water usage up. I had heard $50/unit but thought since these were mostly efficiencies that might reduce the total water usage. Not pessimistic enough.

Rent amount via looking on CL for similar rentals in the neighborhood. I love your rentometer site! According to that site, my rental values are right at the top of the "good value" range. It looks like "average valued" slots in the area are going for 1000-1100.

Overall I feel like the CoC for this is a little low considering the initial cash needed. In your experience, is this a typical return for MFH in the area?

[Ramon Jenkins]

I can't forecast an ARV cap rate, which makes it hard for me to speculate on the ARV. Is this something a realtor could find for me?

response : yes with possible arv

coc -> myself yes, for the amount of cash you are dishing out 

( only my 2 cents - prefer at least 10% - 12% )

quick glance : do you have snow removal  in your number or part of property management percentage ?

[John Leavelle]

Hello David,

I have a few questions and info for thought.

Where are you getting your expense  data from?  $2,376 (66.9% of income) seem a little high to manage a rental property.  Not saying it is wrong - just a lot.

What type of Mortgage are you using? 30 years at 3.46% APR sounds like a conventional home loan. That is only good for a 1 to 4 unit property. 7 units would require a loan from a commercial or portfolio lender. The rates and terms would be different.

You say rents are at the top of the "good value" range.  What is the Median rate for each type of room (2 Bedroom, Efficiency)?  You estimate  it to be a C property in a B neighborhood.  I assume  you want  to improve (rehab) it to a B property.  How will you be able to raise  rents if you are already  at the top of the range?

What is square footage of property?  What are you basing $25K rehab cost on? 

I have the same REI goal as you (replace W-2 income using Buy and Hold strategy). However, I have some basic requirements that each property must meet; They must Cash-flow a minimum of $100 per unit per month when purchased . I must be able to improve it to a minimum of $200 after all rehab and property stabilization (18 - 24 months). Based on the data you provided you will be Cash-flowing $78.80 per unit. Not sure how you would improve that without rai

[John Leavelle]

Sorry ... my post got cut off.

As I was saying, I do not know how you would improve Cash-flow without increasing rent rates. 

Recommend you double check your expense data and projected mortgage info to make sure analysis is correct.

FYI ... I always am very conservative  doing analysis and use 55% for expenses.  Unless actual data is provided by Broker/Seller.  If it doesn't come close to my Cash-flow requirements then I move on.  :)

John Leavelle

[Daniel Hanson]

Assuming I'm reading the BP calculator output correctly ( I haven't used their spreadsheet), the cashflow and COCR look unattractively low, for taking the risk of investing from across the country.

I would also completely ignore the city assessed value.  I've seen them off by a factor of 100 to 200% vs. purchased prices.

[David Stover]

@John Leavelle Thanks for your thoughtful response! Lots of good information here. I'll be the first to tell you I'm not sure what I'm doing, so I could be overlooking a lot. For example, you're totally right about the mortgage calculations; I was assuming rates and terms for a SFH. I've taken an action item to read up on commercial loan rates and terms, thanks to you!

As for my expense data, $2376 breaks down as follows:

$300 - Water/Sewer (~$40/mo/unit)

$140 - Garbage ($20/m/u)

$70 - Insurance

$497 - Prop. Tax (listing claims ~$5900 annual, ~3%)

$20 - Landscaping/Snow

$284 - Vacancy (8%)

$284 - Repairs (8%)

$355 - CapEx (10%)

$426 - Prop. Mgmt (12%)

As for "good value" rents, I was comparing my rent numbers to the rentometer site @Ramon Jenkins introduced me to. The site is geared toward renters, so a "good deal" is a deal much lower than market rate. The average rent in the surrounding units was at least $100/unit higher than my estimated rents.

The square footage of the property is not in any of the listings I could find. Milwaukee City Assessor's office doesn't seem to offer property attributes for parcels listed as mercantile apartments.

The $25K rehab cost is the roughest swag in this entire calculation, in my opinion. I have a few interior/exterior pictures to go off, the google maps images, and not much else. I don't have a sense of rehab costs in this area, but all the pictures suggest the unit will need at least a new roof and aesthetic rehab, wiring, new appliances for all the pictured units.

Further, the listing claims 6 slots of off-street parking but no pictures. It's a huge question mark for me. Is there a parking structure? Paved? What is the condition? So, I tried to be pessimistic with my numbers here. I worry I might have to get a contractor's estimate to get a better feel for this number.

Can you share any experience on calculating rehab costs for remote properties? Any advice here would be immensely helpful.

Overall the feedback I'm getting is that the margins on this property are slim. I agree with the $100 rehab'd to $200 cash flow numbers. This seems especially reasonable for a remote property with a lot of cash invested.

Thanks for all the excellent feedback!

[Jason Bott]

Originally posted by @David Stover:

@John Leavelle Thanks for your thoughtful response! Lots of good information here. I'll be the first to tell you I'm not sure what I'm doing, so I could be overlooking a lot. For example, you're totally right about the mortgage calculations; I was assuming rates and terms for a SFH. I've taken an action item to read up on commercial loan rates and terms, thanks to you!

As for my expense data, $2376 breaks down as follows:

$300 - Water/Sewer (~$40/mo/unit)

$140 - Garbage ($20/m/u)

$70 - Insurance

$497 - Prop. Tax (listing claims ~$5900 annual, ~3%)

$20 - Landscaping/Snow

$284 - Vacancy (8%)

$284 - Repairs (8%)

$355 - CapEx (10%)

$426 - Prop. Mgmt (12%)

As for "good value" rents, I was comparing my rent numbers to the rentometer site @Ramon Jenkins introduced me to. The site is geared toward renters, so a "good deal" is a deal much lower than market rate. The average rent in the surrounding units was at least $100/unit higher than my estimated rents.

The square footage of the property is not in any of the listings I could find. Milwaukee City Assessor's office doesn't seem to offer property attributes for parcels listed as mercantile apartments.

The $25K rehab cost is the roughest swag in this entire calculation, in my opinion. I have a few interior/exterior pictures to go off, the google maps images, and not much else. I don't have a sense of rehab costs in this area, but all the pictures suggest the unit will need at least a new roof and aesthetic rehab, wiring, new appliances for all the pictured units.

Further, the listing claims 6 slots of off-street parking but no pictures. It's a huge question mark for me. Is there a parking structure? Paved? What is the condition? So, I tried to be pessimistic with my numbers here. I worry I might have to get a contractor's estimate to get a better feel for this number.

Can you share any experience on calculating rehab costs for remote properties? Any advice here would be immensely helpful.

Overall the feedback I'm getting is that the margins on this property are slim. I agree with the $100 rehab'd to $200 cash flow numbers. This seems especially reasonable for a remote property with a lot of cash invested.

Thanks for all the excellent feedback!

 David, you will want to get the insurance # firmed up.  I would suggest pushing it to $85 at a minimum.  That will be for a barebones policy where you are insuring for the purchase price and Actual Cash Value.

This type of property can get to the $70 per month mark if it's part of a portfolio.  

How that helps

[John Leavelle]

@David Stover If you proceed with this property or any future deals you will want to have a good General Contractor (maybe more than one?) to walk the property and develop a bid for all items that need repair/upgrading.  Do it after you have a contract, but, before due diligence is finished.  It will help justify any credits or discounts you are asking for (Lower than asking price offer).  Be sure to pay the GC for his time.  You may not need to complete all the repairs/rehab up front, but, but planned for within a set time frame. 

You also mentioned previously that it is a pre-1900 property.   When was the last renovation completed? What systems need to be brought up to code?  Again, General Contractor will be needed.

A good ball park number to use for your own rehab estimate is $20 - $25 per square foot for standard cosmetic rehab. Plus any CapEx items needing repair/replaced (i.e. new roof). If you are planning upgrades to some areas (higher quality) then use $30 - $35 per sf. That's why I was asking for the square footage. You will also want to know what the rent per sf is.

Example:  1800 sf property, needing full cosmetic rehab and new roof.  1800 X $25 = $45,000 + $5,000 roof = $50,000.

It may not need a full rehab which would be good for you. But, from a conservative analysis point of view it's where I would start until you can physically walk the property. Pictures on listing may not be current! And I would want to make it look like most of the properties around it to get the ARV you want.

I recommend you get J Scott's book "The Book on Estimating Rehab" to help you out.

Hope this helps.

John

[Michael Henry]

David, Your snow removal and lawn care cost will probably be higher as well.

Thanks,

MH