Help me analyze this deal! 46 Units - Am I missing something?

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Hi everyone. I just started using the BP Calculators in the last week and I plugged a few of the deals in that I found. I ran this one and the results I am seeing make me wonder if this is a good deal or if I am missing something.

This is a portfolio of 46 units. My thought was to find investor(s) to put in the first $600k and then the owner is financing the remainder at 5% with 30 year amm and a 10 year balloon.

What do you guys think? Thanks for any input you have!

Jonathan R McLaughlin · Answer

Hmm....I'm not seeing the same appeal.

capex  seems WAY, WAY low.

Repair low

Turnover costs?

ongoing legal and accounting?

lease commissions?

Management costs seem high at 11% so you may have some of this baked in.

Not sure how you are going to get a 30 year amortization on the main note? You'll need to structure this as a commercial loan so 25 is max and 20 more likely. Reset on rate every 5 years and/or 10 year balloon. FHLB 5 year rate is 3.08+2.25 spread (YMMV but it will be similar method of computing rate) so at least 5.4% I'd bake in 6 to be safe as these can take a while to close.

loan fees--call it 12K

Closing costs will be a lot more than 3K--you need an appraisal at least at 1500 and maybe more, you will need the partnership agreement drafted (welcome to lawyer land!), environmental phase I and maybe phase II, company filing blah blah. Figure 15k-20K You will want your own inspection during due diligence thats another 1200 or so.

Does the 25K you put in the repair costs really yield 200K in immediate value increase? I'm skeptical, what is the plan?

"Find investors to put in the first 600K"--thats a pretty big raise: and where is your money?

Are the taxes current or based on the new purchase price?--I've been whacked by making that "should have been obvious" mistake.

Trying to help, not be negative. Run the numbers again, maybe, with these assumptions and see what you get.

Good luck!

Arun Iyengar · Answer

@Daniel Coblentz,

It seems like these are newer properties. As such, I agree that the maintenance costs could be much lower. The math seems to work out as a good investment.

Other related questions that I would now look through:

1. What is the rental trend in the location you are purchasing?2. What is the vacancy trend?3. Is it in a relatively safer location (safe can be as simple as you will not run into trouble when you visit your property)?

If you are comfortable with the above qualitative metrics, you should be ready to go. I do think these numbers seem very good and would dig quite deep to test the veracity of them before committing.

Jonathan R McLaughlin · Answer

@Daniel Coblentz no problem. I can certainly see more of appeal given what you have outlined. My bad, I thought the owner was doing only a piece of the downpayment not the whole note, so was outlining more conventional financing. I don't see any reason why he couldn't do that. Great loan.

Good your adjusting the repairs, I think sellers often ramp down their repair spending in the time before the sail

For the capex, you are going to pay it either in repairs or in the sale price so I'd include at least 10%, in other words, lets say you have a 10 year roof, the place is 5 years old. Even if you don't do anything and hold for 5 years, you go to sell and a buyer says, "hey, the roof is at the end of its useful life, I have to replace" so they discount in the offer. Certainly as an investor, I'd want to see more allocated.

Still a little confused on the management costs. Are you self managing? In any case, in addition to the vacancy rate (which I remember being low). You may have to pay lease commissions of 1/2 or 1 month on every tenant turnover, and there are renewal fees as well. And a few grand to refresh/repair upon turnover of a bad tenant every now and then. If these add up to 11% that makes some sense, but I wouldn't count on driving that number down if so. You mentioned legal and accounting fees so there is a lot packed in to the 11% already.

I would break it out so your investors can see the expenses. More professional. Especially if you are self managing....I don't think I'd want to be paying you as sponsor that much....

I'd break out the utilities and other expenses too.

I can't escape the feeling its a little light, though of course I don't know the property. Would be curious to see the revised calculator if you care to share.

Good luck!!

Daniel Coblentz · Answer

@Jonathan R McLaughlin Thank you very much for the feedback!

capex  seems WAY, WAY low. - What would you suggest this should look like? The properties are fairly new (3-5 years) so I wasn't banking on a lot of repairs for the first few years.

Repair low - I am going to adjust this up a bit, thanks!

Turnover costs? - These are included in the 11% mentioned below. Unless you are thinking there are other things I should be thinking about other then vacancy, cleaning, minor repairs?

ongoing legal and accounting? Included in the numbers I put in the report

lease commissions? Included in the numbers I put in the report

Management costs seem high at 11% so you may have some of this baked in. I believe this 11% will come down but wanted to leave it there for now to "assume the worst".

Not sure how you are going to get a 30 year amortization on the main note? You'll need to structure this as a commercial loan so 25 is max and 20 more likely. Reset on rate every 5 years and/or 10 year balloon. FHLB 5 year rate is 3.08+2.25 spread (YMMV but it will be similar method of computing rate) so at least 5.4% I'd bake in 6 to be safe as these can take a while to close. - The current owner is offering a 30 year amortization with 10 year balloon on the balance after the 600k down. Are you saying he isn't allowed to do it that way and we will be forced to do it as you mentioned above?

loan fees--call it 12K -

Closing costs will be a lot more than 3K--you need an appraisal at least at 1500 and maybe more, you will need the partnership agreement drafted (welcome to lawyer land!), environmental phase I and maybe phase II, company filing blah blah. Figure 15k-20K You will want your own inspection during due diligence thats another 1200 or so.

Does the 25K you put in the repair costs really yield 200K in immediate value increase? I'm skeptical, what is the plan? Should've been more clear on this. I estimate 25k in upgrades (probably a little higher then needed) but the deal, if it happens, will also include 16 acres of land currently worth $200k. That is the increase I put on this.

"Find investors to put in the first 600K"--thats a pretty big raise: and where is your money? I have been working on getting investors for some time, and continue to add to my network so I feel pretty confident that the investors I have already spoken to will buy into the right deal. Which is why I am here :-) Side note* My profile says I just signed up but I've actually had an account here at BP since 2016 so I've been doing a lot of research. My money is tied up in my Construction company so the goal is to use my contacts money for the DP and sign the note myself. Still working on all the details but that is the plan.

Are the taxes current or based on the new purchase price?--I've been whacked by making that "should have been obvious" mistake. - Noted! I will adjust accordingly.

Trying to help, not be negative. Run the numbers again, maybe, with these assumptions and see what you get. - I certainly appreciate the feedback! This is why I have come to love BP!!

Daniel Coblentz · Answer

@Arun Iyengar Thanks for your feedback! I am still investigating a few of these items but I will answer what I know.

1. What is the age of the property? Still waiting to hear for sure on this one.

2. For older properties, your repairs are going to be higher - I typically use up to $500 per unit per year if I don't have actuals. I have the financials for the past 3 years so I was basing it on these numbers but I will adjust to see how that looks. 3. You are missing reserves for any other major repairs - typically around $200 per unit per year. Thanks! I will adjust accordingly.4. Is payroll covered in management for your on site help? Yes. I believe I can get these numbers to come way down but I wanted to base it on what is in place at the moment. 5. How about expenses for water, sewer, landscaping etc. - I should've noted that the utilities were all included in the electric budget I included in the report.6. How about outside contract services, legal fees, permit fees etc? - These are included in the 11% I figured for the management fee.

Arun Iyengar · Answer

These numbers look great!! Some things to consider:

1. What is the age of the property?2. For older properties, your repairs are going to be higher - I typically use up to $500 per unit per year if I don't have actuals3. You are missing reserves for any other major repairs - typically around $200 per unit per year4. Is payroll covered in management for your on site help?5. How about expenses for water, sewer, landscaping etc6. How about outside contract services, legal fees, permit fees etc?

If you've got all the above figured into your calculations and your numbers are as shown, this is a good deal and you will be able to sell to investors.

Good luck

Help me analyze this deal! 46 Units - Am I missing something?

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