What am I missing? 6-plex deal

Question

I'm a new investor... so new that I have never purchased a property and still rent myself, so apologies if I require a bit of over explaining. Any help would be appreciated in evaluating the following situation.

I live in Kansas City. There has been a property available in a small town in Missouri, and hour and a half away from me, for sometime. It's an old, historic exterior 6 plex. From what I can tell, at least have of the units are renovated and are absolutely beautiful. They would go for a fortune where I live. The property is for purchase for $170,000. I don't know much about the town, but this is what I've been able to find.

The total population is between 9-10K. Approximately 35% of the town rents. The average income is low- 30K. The growth is stagnant. There are a lot of homes for sale listed right now that have been on the market for several months. However, when I try to find rentals, I only find one available unit in the town. The "average rental data" in the town on data I can find is, I'm assuming, based on this one, 1 bd 1 ba unit.... $550. So, I could use this number times 6 large units for a yearly gross of $39,600. My total expense I'm showing based on the data I have is $29,462.

What am I missing? The pictures I've seen of the exterior and the unit(s) are gorgeous, and it seems like a ridiculous deal. It is in the "downtown" which is rundown. "Downtown" is in quotes because that's how small this town is. :) It's also been on the market for awhile. Tthe town is small and has little commerce. I've factored a vacancy of 15%. My capex is 10% and repairs 8%, since the units are mostly new and have all new appliances.

Once other thing. The seller mentions they will be taking a loss since they've clearly put a lot of money into rehabbing and restoring it. I can't figure out why they would be selling it at all. Any insights or similar encounters?

Thank you all!

Edward Stephens · Answer

@Marissa Carroll My recommendation is to start small.  A six unit deal in need of rehab that is an hour and a half away is (in my opinion) too much for a brand new investor.  Buy a primary residence for yourself and learn what it's like to be a home owner.  You can even buy a 2-4 unit property with an owner occupant loan and live in one of the units.  Focus on analyzing deals closer to you and where you want to live for now.  The more narrowly you focus your searches and analyses (both geographically and with respect to property type), the more of an expert you'll be, and the more money you'll make.  If you don't believe me, ask your agent. ;)

Gary Gummig · Answer

It sounds a lot like a property I saw on Craigslist about a year ago.  I was curious, because it looked too good to be true with big white columns (looked like an old courthouse or something), high end finishes, and the same verbiage about taking a loss and might be willing to do trades of some sort.  I tried to get in contact with the seller, but never got a call back.  I came to the conclusion that it had to be a scam, but I never contacted a realtor or drove up to see it.  No idea if it's the same property, but your description sounds very familiar. Good luck on your deal.  If it's the one I referenced, I'd definitely have a realtor involved since it seemed like a very odd deal.

Marissa Carroll · Answer

@Edward Stephens

No worries Edward. There's no way I would take on something like this by myself, especiallly so far away. I figured if there was something legit there, I could bring it to an acquaintance I have who rehabs and if it was any good, play some part/learn from a partnership on the deal. It never hurts to double check. :)

John Ching · Answer

Marissa, I'll second what Edward said. For your first deal out of the chute, an hour and a half away is going to get old fast. Nothing wrong with getting the property under contract and wholesaling it, though.

You've painted some broad strokes here. Why has the current owner been unable to sell it? Are you sure about those rents? You say you don't know much about the town, I'd start with that. Is the town dying or stagnant? What is the main source of employment for the town? Things like that.

There's a lot of missing pieces to this puzzle. Don't be thrown by the beautiful, historic-ness of the property. Look at it from a business perspective. What will those units rent for and who's going to rent them?

MO has tons of these little podunk towns that can generate good cashflow, but you need to know what you are getting yourself into. Again, I think the distance is too great for a first-timer.

But do your analysis and figure out for yourself whether or not the, "juice is worth the squeeze"?!?!

Marissa Carroll · Answer

@Lee Ripma - I do have an agent that I could go through. Since I can't find much data online as far as what the units could rent for, I figured I could call the complexes in the city and see what their prices are. When I look on rental sites, it shows only one vacancy in the town, which seems odd.

@Andrew Syrios - You're right, I would definitely need more information on it. I'm trying to do some of it up front before trying to contact the seller.

@Jeff Brower - I did have 10% property management in my estimate. I did realize today, however, that the interest rate I used on the loan was a residential and not commercial number, so that would go from 4.5% to... 8% or so? Thanks for the link to your analysis. I'll go through it in detail.

@Gary Gummig- That's the one. I would certainly have my realtor involved before doing too much, but I too have been trying to figure out if it's a scam before bothering him. I have only been looking for a little over three months, but if it's been in there a year it probably is a scam.

@Jeremy Paschedag - I don't have plans yet. It appears to be a complete gut and I think some of the units are just frames and have utilities run but aren't complete. Theoretically, they could be what they need to be.

Thank you all for your help! There's certainly a lot of valuable information on this forum.

Jeremy Paschedag · Answer

Not sure what you have estimated for expenses, but with multi-family properties, you more than likely will have some utilities to pay for, such as water, sewer, trash.

You mentioned that 3 of the 6 units were in great condition.  Do you have plans for the other 3?  Were you planning to have the rents all be the same?  If so, if a tenant from an 'older' place see's the inside of a 'nice' place (as tenants talk and befriend one another), the 'older' place tenant may not be so happy if they are paying the same rent as the 'nice' place tenant.

Just some things to think about.

Timothy Stauffer · Answer

Hey great seeing you're on Bigger Pockets. Kansas City is a great place to invest.

Jason Hawk · Answer

Welcome to BP! I work with people in the Kansas City market and love to connect.

Jeff Brower · Answer

Sorry, I said that wrong. Same outcome though. Your NOI= Gross rents- expenses. So for the 50% rule 39600-19800= NOI of 19800. Subtract your debt service to get your cash flow.

Jeff Brower · Answer

Along with your capex, maintenance, and vacancy, don't forget to factor in 8-10% for management. Even if you plan to self manage, you will want to account for this expense because at some point you will want to hire it out. Where is your expense number coming from? Seems a bit high to me (unless you are including debt service, which makes more sense). Usually, as a quick analysis ballpark for 5+ unit commercial multifamily, folks will take 50% of the noi and use that for their expenses. Your gross is not $39,600, that is your net. So NOI= $39600/2= expenses $19800. If your debt service is ~$1500/month then debt service for the year would be $18000. In this scenario, your cash flow would only be $19800-$18000=$1800 for the year. This is just a quick and dirty 50% rule analysis. With an older building, your capex may be higher than average.

Take a look at this analysis that I recently did on a 4 unit that I was considering. Slightly different as I was doing residential analysis with an fha, but you will get the idea.

https://www.biggerpockets.com/forums/88/topics/410556-4-unit-analysis-1-br-units-fha-owner-occupied-loan

What am I missing? 6-plex deal

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