10 units / 300k list / 10cap - what am I missing?

Question

Hey BP,

I've done a few successful SFH / Condo deals in my area, and am looking to move into apartment buildings out-of-state (very low cap rates and high entry points in Boston area).

I'm looking to do my first deal with my own capital and start building a track record for lenders, future investors etc...

That being said, I'm running into a few hurdles:

1. It's tough to get financing for loan size <1m

2. The lenders I've talked with don't want to lend to an out of market investor (esp. for something on the small end).

I've uploaded the offering memorandum for something that fits the ballpark of what I'm looking for and have run some sample analysis.

Would love it if someone could help me poke holes in this or tell me what I'm missing, or how you would approach getting this deal done (or, why I should walk away).

Here is the high level if you don't want to go into the PDF:

- 300k list price, 10 units, 10 cap in Cincinnati OH (near Xavier University)

- "C" class property in B class area

- Potential to reduce expenses by submetering gas heat / water (or putting in a RUBS system)

- Potential to raise rents by phasing out subsidized tenants and re-positioning as market rate class b/c tenants or class a/b student housing

Offering memorandum:

https://drive.google.com/open?id=0B9-BaXwTNSWYdzhN...

Deal analysis:

https://drive.google.com/open?id=1gVmAPH7eLqzxBzhG...

Thanks for any help here!

James

Tyler Weaver · Answer

Have you walked that neighborhood?  It has been a few years since I have been on that part of woodburn. While geographically close to Xavier I did not get the feeling a property would market well to students. It is possible though. 30k/door seems at best high for that neighborhood.

I do not own anything in Evanston so I do not have first hand experience. There are a few positive  things going on in the area that should be good for the market. I would check the crime maps etc. Cincinnati can be extremely block by block in nature.

If you want to talk about this property or cinci in general I would be happy to take a call or meet for coffee if you are coming into town sometime.

Jackson Carr · Answer

Not to pull up a 7 day old thread. But I noticed there are no Capital reserves in your analysis, and R&M for a building that age with non updated infrastructure is low. That boiler alone is probably from the early 90s. It has rust on the bottom, the back plate is  hanging off and i know the circulation pump bearing assemblies ($250)x 2 maybe 3. I have bad luck with those going out almost yearly, flame eye sensors quitting, and the circulation motors every 2-3 years ($600) depending the brand.

I do maintenance on 4 different boiler systems at a few of the wineries here in Napa (some for water heating and some for space heating).  They are not cheap and you do not want that unseen cost to hit you.

If you ever have any questions about infastructural maintenance cost, I would be happy to help.

Good luck

John Madrid · Answer

Stay in your own backyard!  Managing from a distance is difficult at best.  When buying any income units get copies of:  leases, renters checks deposited to owner's account, actual expenses, 2 years tax returns verifying income.  Evictions will topple cap rates.  Try buying the best units near you and remember the holy grail....LOCATION, LOCATION, AND LOCATION! I have 3 units on the beach, Pismo Beach, Rents at $11,080, with expenses at $1,455.  When one unit goes empty, a Craigslist advertising for one week will usually get me 10 to 15 qualified applicants.  Try advertising in Craigslist "College Students Apartment $____ located ________"  and see what the response is.

Good luck John Madrid email me if I can be of help.

Ben W. · Answer

Have you toured the ppty?  what is YOUR capex list?  that is what matters.

James E. · Answer

@Michael Gansberg  / @Kevin Olson - I've been reluctant to get into the multifamily space in Mass. mostly because it's a pretty hostile environment for landlords. I've been able to manage it with the condos I've done but once I reach a critical mass I realize things like evictions are going to be an unavoidable reality no matter how well your credit / background checks are run. I am also looking in parts of Southern NH and CT but I'm still finding cap rates to be far superior in places like Cinci and KC.

Agree on building out a team, but also am starting to realize it's kind of like a chicken and the egg scenario... tough to really build a team without any work for them to do, and tough to have work for a team until you have a deal underway.

@Ben W. Yes I saw that as well... I'm not sure if they just found a good off-market deal when they purchased, if they put a good amount of capex in (marketing package says they rehabbed 5 units) or if they are just being greedy trying to exit at this price. I certainly wouldn't purchase at 300, but at 250-275k even assuming 3% rent increases and 50% expense ratio (higher than marketing package suggests), the cash flow appears to be attractive enough to at least make a low priced offer.

@Corey Mason is an agent I've been working with on this and is the "boots on the ground" presence, so Corey wondering if you'd want to chime in here at all?

Thanks again all - James

Daniel Crespo · Answer

@James E. Everyone is making great points about the neighborhood, but I would like to throw out something else to consider.  As a Xavier alumni and employee I know the area and campus well, and I know where students like to rent off campus. They rent in good neighborhoods in walking distance to campus.  Particularly in Evanston, they live on the first few blocks of Woodburn, just north of I71 and not much elsewhere.  This location is a bit further south of I71, so if your counting on capturing Xavier students as a key strategy, I would reconsider.

Kevin Olson · Answer

@James E. I have to agree with what has been said thus far, I know coming from our area seeing anything less than $100k per unit seems like a great deal but it is all relative once you start backing into the #'s. I've looked at investing out of state or from afar and my advice is you can defintely do it and make some great returns but you need a team,system in place at that location. Someone with boots on the ground that you can trust.

If you're willing to invest in riskier neighborhoods then others, you can find similiar #'s in areas of western mass, RI/CT and along northern MA/southern Nh border. At least this would be driving distance from Boston.

Good luck! Look forward to hearing your strategy moving forward.

Ben W. · Answer

I always research the purchase transaction.  in this case, the seller purchased the ppty for 2/3 of the listing price only 2 years ago.  even though people are starting  (keyword "starting") to get excited about this area, there is no way to justify this price today.  SUMMARY:  enter at your own risk.  Trust but verify.  etc, etc, etc.  As an beginning investor, you do not want to take this kind of risk, YET.  You did great work in the analysis!!!

Michael Gansberg · Answer

@James E., why go all the way to Ohio for lousy multifamily properties when you can find them in your backyard? Banks might be more comfortable if you were within driving distance. That said, I looked in New Britain, CT and Springfield, MA(both of which are under two hours by car from Boston,) and pretty easily found some six-unit properties trading around $250 to $300k+.  The markets around New Britain and Springfield are probably similar- I noticed some 6 unit properties trading under $200k, bring your toolbelt to those though. Or a wrecking ball.

I agree with @Ben W. - managing a difficult property in Ohio from Boston could be quite tough, especially if this is your first rodeo. Early on, you'll want to keep your eyes on things occasionally, just to keep management honest. You'll want to do that later on as well.

James E. · Answer

Thanks for the great info all - crazy to think that 15k / unit is a more realistic price point for this area...is that even below the cost of replacement? You must be getting some great cap rates at that price point. Seems like we need to do some more digging re: the specific area and property systems / structure, and also seems that this price point is on the high end for the area.

10 units / 300k list / 10cap - what am I missing?

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