Real Estate Deal Analysis & Advice
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Updated about 7 years ago,
Appartment building
Hello BP! I think I found a good one!
This is a 5 Story appartment complex outside downtown.
First story is commercial businesses leasing out.
Second story are 4 apartments all leased, I haven't seen anything but the hallway but they look very nice.
3rd 4th and 5th are gutted.
The whole thing is going for about $310,000
I'm guessing conservatively that the current monthly income is around $4000. The mortgage would initially be about $1400.
I haven't asked about the listing yet. I don't have a business set up yet. My brain is fried with excitement. What should I ask about this property and what ducks do I need to put in order?
Ask for a copy of the trailing 12 numbers for the building. 2015 P&L and Tax Return if they will give.
Find out about property taxes and insurance. Quality of the Roof. Run the numbers and buy based on what is and not on a story of what will be or could be.
Was it a project that got stalled? Find the history of the building. Looks like it could be a great price, but please complete a thorough due diligence on the property. Looks like a lot of construction work that would be needed to finish the building. I would ask if I was capable of doing a project in this scope etc..
Hope that helps - Anish
@Anish Patel What do you mean by trailing 12 numbers for the building?
Thanks for the advice, I'm emailing the listing agent now.
@Jonathan Johnson Trailing 12 just means the P&L for the last twelve months. So you would want the most recent financials from lets say August 2015 to August 2016. Don't let them just give you the 2015 numbers as you want to see how its doing now and the best predictor of future performance is its current performance. Also ask for the rent roll (current tenants, rent amount) and copy of the leases so you know for instance the commercial tenant on the ground floor isn't leaving soon etc...
So I've been emailing finally with the agent. First email was an old one, second worked after she got back.
Hi John,
I apologize for the delay in getting back with you. I have been out of town and I did not realize I would be without internet service. Please find below profit and loss from the owner. Owner is selling due to other interest and does not wish to be invested in real estate.
2014
820 Market St., Parkersburg, WV 26101
Income-$38,841
Expenses
RE Taxes-$4178.64
Insurance-$4740.39
Repairs-$794.24
Trash-$2673.66
Utilities-$1041.58
Water/Sewer-$1062.11
Legal fees-$85
Fire/Police Fees-$1792.01
2015
820 Market St., Parkersburg, WV 26101
Income-$40,052
Expenses
RE Taxes-$4155.72
Insurance-$4218.34
Repairs-$283.06
Trash-$2421.92
Utilities-$1198.60)
Water/Sewer-$1114.74
Legal fees-$85
Fire/Police Fees-$1806.42
Upon your review, please let me know what further questions you have regarding this property.
Hi Jonathan,
At a quick glance the expenses look a bit light (currently shows about 38%, where a quick rule of thumb is 50%). Repairs and maintenance were only $283 last year, may be a sign of some deferred maintenance on the property. There is nothing in there for property management which could run 10% of collected rents plus lease up fees. A few preliminary questions are outlined below.
Some questions to ask broker:
What is the unit mix (number of 1Bed, 2Bed, etc.)? Ask for current rent roll to see what each unit is getting per month, if the tenants are on leases and when those leases expire?
What is the current occupancy of the property?
Is the commercial space leased as triple net (meaning tenant pays for everything)? When does the lease expire?
Questions to ask yourself?
How well do you know the market? What has job growth and population growth been over the past couple years and where is it projected? What are the comparables in the area getting for rent?
What is the capitalization (cap) rate for similar properties in your area?
How much capital do you need to finish the 3rd, 4th, and 5th floors and what rents can you get for the units?
Are you going to self-manage the property? If not, factor in 10% of collected rents plus lease up fees.
Hope this helps.
@Anish Patel The roof was redone in 2010.
Those are some great questions! @Michael Sjogren I'm hoping to see the property within the next few days. My father in law is a licensed contractor and lives in the area, hopefully he will come as well.
Here are two reports I made with the numbers I have, the repairs are pretty general based on just some comparable costs of getting things installed. The first one is if I buy it and don't do much to it but move in to the fourth apt. The second report is if I remodel the 3rd and 4th floors to be apartments and rent them out at a conservative market rent.
What kind of financing options are there for a project of this size? The DCSR on my report, I just noticed, is programmed incorrectly and is actually around 1.25. There's extra capital needed to remodel the 3-5th floors, but I don't know what kind of options there are for funding that.
The area is on the border between downtown and a less friendly neighborhood, but the city just got a big government agency to move in about a year or two ago. Though not a hot market, these apartments will fill up at decent rates.
....Who did your budgeting? If I am reading this correctly, you have in your spreadsheet of ~85k. Is that per unit that you are adding? Or for the build out of 2 floors? (more like ??!!)
Those look like some pretty large floor plates looking at the picture, and you did say they currently have 4 apartments on the 2nd floor.
So you are looking at building out the 3rd, 4th floor at least, I am assuming to have a similar layout to the lower floors to have all your mechanicals lined up. Still, you are going to finish 8 units for 84k?
Have you had any experience building out a shell building? Are the electrical and plumbing capable of handling the extra load from the new units? Does anything need to be modernized? What sort of finish are you looking to do?
I have bought single family homes and spent over 100k on them on renovations. 1 house. Sometimes intentional, sometimes by necessity when it comes to structural. You mentioned the finishes on some of the units are quite decent, so let's say you go to Ikea and buy mid grade kitchen cabinetry, you'd be at least spending 4-5000 a kitchen. Finishing out a bathroom may run you 5000 or so between plumbing and fixtures.
So between building out a bathroom and just buying kitchen cabinets.... that's already 80k for 8 units. No labor, no flooring, no drywall, no framing, etc.
I'd think you'd be spending closer to 30-40k a unit to build out to be more realistic, especially looking at your projections of taking rent from 3000 to 10000. A rough 1% rule would suggest a valuation from 300k (which is near his asking price right now) to around 1mil.
It may still be a viable project, especially if there is potential for the area, but I would seriously question how you got to your renovation budget, and more importantly, if the sources that you relied upon that got you to that figure are reliable and capable of taking on this sort of project.
@David Chan I did the budgeting and I'll be the first to tell you... "I don't know what I'm doing."
I've started reading the rehab book here on BP, those numbers are just made up guesstimates. Your questions, though I can't answer them, are extremely helpful because now I must figure those out.
The part of this that I'm still hanging onto in considering such a project, is that it seems like the 4 apts and 2 commercial spaces could fund the loan payments and then some. It wouldn't need to be done all at once.
Of course, this might not be a good deal at all. There's also that possibility.
My gut is saying this is more risk than you should be taking on.
Every one of my projects has been extensive remodels. The area I operate in are homes built 50-100 years ago. Good bones, bad state. I completely rebuild them inside and out and I can tell you I can easily spend 85k on a single family without even blinking.
To give you an example, kitchens can run you 10k for the most basic gut/build out, I typically spend around 20k with Ikea (love their soft close and quality) + quartz/granite countertops + slate appliances. Bathroom remodels are 5k - my typical 8k with tile surrounds instead of whole unit inlays. Flooring runs around 4-5 sq/ft installed if you are using cheaper engineered or tile, more if you want real wood. Drywall you might get away with anywhere from 1 to 1.4 a sq feet installed.
I am not a contractor, so you may be able to get these numbers down if you have construction connections backing you. I am also a higher end type, so you may not need to go as far as what I typically do.
What I can tell you is that contractors generally have to be dealt with very aggressively as business partners. You will run into trouble if you slack with cost or schedule control, and I have paid my tuition in the school of the hard knocks myself.
A project of that scope, in my opinion, would be a "barely worth looking at" project from my perspective having done 25 renovations, 17 of them total guts, 11 of them over 100k each.
It is a personal opinion, and it is not because the money isn't to be made there. But you have to acknowledge the complexity of projects and the risk that you have to undertake in every investment. The complexity of turning a shell of a building, with what looks to be outdated mechanical systems and structural elements that most likely needs updating, as well as any city permit/planning elements are part of the equation that you have to consider if this is worth the risk.
I know I will get flak from members of this forum. In real estate I seem to find there are a lot of go-get'ers that wants to swashbuckle their way into very lucrative deals or home runs. I may be a bit of a wet towel on a very exciting project, but I would be very cautious to make sure you will not go into a deal that will become your last.
@Jonathan Johnson did you end up backing out of this one?