Analysis help - Small multifamily

[James Winters]

Hi all! I am new and I am trying to understand how to find a good deal so I am walking throughout an analysis of a small multi-unit from loopnet. It show up as a 12 CAP so I can't understand how it could be a bad deal. Here's a link to details: http://www.loopnet.com/Listing/815-9th-Ave-SE-Rochester-MN/8804533/. It’s 6 units renting at about $500 each per month. Not sure on the rooms per unit, but rentometer says the average around this area is $867 so there is room for value add even if getting it at a 12 cap isn’t good enough.

Can someone take a look and let me know what my next steps should be for analyzing this deal? I know it would be a commercial loan, so I should plan to put down 25%. I reached out to the agent for more pictures and a P&L.  What else do I need to think about, and what would a good “low ball” offer be on this?  Thanks!

[Michael Lee]

Hello and welcome here James!  Please know that my purpose is meant to teach you something about real estate and is not meant as an attack on you personally.  I have been listening to a gentleman that has been buying real estate for about 25 years and is a multi-millionaire.  He currently owns almost 5,000 units of all apartments.  Price is not his #1 concern.  His #1 concern is positive cash flow on day one after all bills are paid.  Another thing near the top of his list is adding value by raising the rents or making improvements interior or exterior.

I would also research the local area rents and raise them when the lease is up or if their is a clause that says you can do that with the proper notice.  Plan on looking at all leases, all unit interiors to access any repairs that need to be done or any upgrades your strategy calls for.  Look at actual income and expenses for the last year on a monthly basis.  That gentleman I referred to earlier has predicted to make 150 million this year.

He walks properties "for sale" everyday. He works hard everyday and just turned 60 years old but he believes working at lease 6 days per week if not 7. His first purchase was a SFH and he feels good that he broke even selling it after an unexpected move out. Since then he has mostly bought apartment complexes and has never lost any money and talks down about owning less than 32 units which usually allows you the chance of hiring an experienced Property Management Company to handle the daily operation that includes the screening and maintenance and you just manage the managers and get regular (once a week) financial statements and you still have positive cash flow.

He's been on that webinar twice that Brandon and Josh do and that is what got me started to listening to him on YouTube.  He says very often to never buy less than 10 units.  I do not have any experience with that so I cannot confirm or deny what he is saying.  He owns his own television station and does about 6 or 7 shows a week that are usually about an hour long. 

That and owning his own jet allows him more flexibility and maximizes him more time to spend with his family.  He is married to a younger woman and has two girls that are about 3 and 6. He is a little pushy on his sales but he has taught me very much mainly because he has so many videos on YouTube.  Maybe you ought to spend more of your time on raising money legally and forming Partnerships that keeps you in control and buying apartment complexes.

He ideally looks for a 6 to 8 cap rate.  Do not count on anything happening in the future.  I looked at that property and some concerns came up to me. One is its age.  Are there any code issues? I would talk to an experienced city building inspector to see if he is aware of any problems.  Have you had any General Contractor do an estimated M & L. to make your repairs or updates that obviously need to be done.  Have you done a worst case scenario?

How many of the six are occupied? Is there any past due property taxes?That gentleman I mentioned before says that finding out who is the broker is the only dependable thing about Loopnet.com. Do not believe any Broker that does not work for you. Are there any mechanical problems? Why are its rents so low? Is it because there is alot of competition? There is not several financial numbers not given like ROI, NOI, or cash flow. That other investor I keep mentioning wants positive cash flow on day one.

You might should call the area's properties and act like a renter fishing around to know their price for renting, their floor plan mix, and are there any specials used to increase their occupancy.  The first impression on the subject property and the other one's in that area?  Trust your gut.  I have never been to Minnesota so I cannot make any geographical statements.  Are there any washers and dryers on the site?  Any tenant negatives?

Good luck to you!

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