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Updated over 7 years ago,

User Stats

31
Posts
15
Votes
Joseph M.
  • Saint Paul, MN
15
Votes |
31
Posts

First (commercial) buy and hold deal analysis

Joseph M.
  • Saint Paul, MN
Posted

Hi everyone,

I've been in talks with a seller of a 5-unit 'apartment' that is a large house.

The Property and Neighborhood

5 Unit apartment out of a converted house. Located in a district where they zone to reserve 10% of each block to be multi-family, with the surrounding 90% to be SFH. This unit is the only multifamily on the block, and only one other could be added per current numbers. The average SFH properties around the property are roughly in the ~$250k, upper-middle class range. I saw lots of recent renovations, stone facades, 3 car garages, fresh paint and new siding. There was also new commercial units coming online which would be competition. But there is investment coming into the area. It is less than 20 minutes away from downtown Saint Paul, in MN. For those familiar, it isl ocated in Mendota Heights / West Saint Paul border. Feels more like Mendota than West Saint Paul though it is in WSP city limits.


There is a 3-wide, double deep garage which is rented out as both storage and parking, and coin laundry. There is also nice landscaping around the periphery, old growth in an establish neighborhood, and a common deck area which was nice too. Has masonite plank siding which didn't appear to need immediate replacement but does not look like it will have much more than 7-10 more years on it. HVAC system is 20 years old, heat only. Air conditioner units in windows. Appliances are very dated. Interiors are dated as well, looks like last update to kitchen and bathrooms was late 70's. Cabinets would just need new hardware but are otherwise in good condition, countertops look newer than the rest of it.

The Numbers

Seller provided:

2x 1 Bedroom, 1 Bath 425 sq ft. at ~$700 

2x 2 Bedroom, 1 Bath 525 sq ft at ~$900-950

1x "Weird" unit with upside potential: Essentially 2 1 bedroom units smooshed together because the city wouldn't license them separately (seller has no documentation as to why) 2 Bed, 2 Bath, 2 Kitchen, 700 Sq Ft., rent at ~$1070. 

Rents are below average for the area but I am fairly confident it is because the units are more dated and smaller than competing West Saint Paul apartments, so I think he is getting about what rent he can get currently. There might be room to move up if they were improved but $1100 for 2 bed/1ba is probably a hard ceiling based on the sq ft and design of the whole building.

Seller also provided:

These are the figures I used in the BP rental calculator analysis above. Based on my current analysis we are looking at $160/door cashflow. Seller currently has 100% occupancy.

(Seller) Financing

Approached the seller with seller financing. He responded that he would consider something "low risk, short term." It's up to me to make a proposal.

My current plan is to propose 17.5% down, going in with an equity partner (me at 2%, equity partner at 15.5%), on a 3 or 4 year balloon amortized over 30 years @ 5%. At year 3 to 3.5 I should hit 75% LTV and I will refinance the seller out.

I am also considering going 20% down but finding a different equity partner (maybe even networking here on BP!) for 18%, me 2%. I would suggest the same but shoot for 30 month balloon at 4.5% instead. 

I estimated financing above at 6% assuming I found a portfolio lender or other commercial lender who would work with me.

I negotiated first towards seller financing before asking for price concessions, but I dont think I'll get much there.

Value Adds

Garages are rented, and the garage is super nice. No room here. Laundry is already coin operated, electricity is separately metered. Water is not separately metered but the cost isn't high enough to merit the investment. I am not sure if seller is current allocating that water expense to the units or rolling it into the rent.

The big upside potential here is if I can get the city to license turning that weird 5th unit back into 2x 1 bedrooms each earning ~$700 and getting a big bump in cashflow. Which would in turn force appreciation of the property and let me refinance out sooner.

My questions

  • Does this seem like a good deal? A good first deal?
  • Rehab cost is estimated for it being turnkey except the carpet in one common area and some new handle hardware for the cabinets
  • How do my capital expense estimates look? The kitchens, siding, HVAC, and half the appliances are getting old though all are still functional. I fear I am underestimating capex, and I will not have much of a cash cushion starting off because this is my first deal.
  • How does my repair set aside look?
  • Estimated 5% vacancy since that's what the seller did, average in metro area is 2.8%. Average for the property management company i'm looking at is in the ~2% range. Twin Cities has the lowest vacancy rate in the nation. Is 5% conservative enough here?
  • Any of my other numbers look funky?

My take is I think it is worth doing, but this is my first deal so I am insecure in that feeling. Also, if I got hit with a capital expense and a vacancy right away my finances would not be able to support it, I don't have a big cash cushion built up. (I'd have about $7k of cushion after the deal is done).

Sorry for the long post, and I really appreciate anyone's opinion. Thank you guys so much

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