[Calc Review] Help me analyze this deal

[Nathan Hui]

Hello BP people, 

I want to revisit an old deal I have previously posted.  

My numbers on repairs/rehab are still rough estimates at this moment, it is just an estimate based on what I have seen so far.

*These numbers represent the way this quad will function after we house hack for a year and are 100% tenant occupied.

**I plan to renovate each unit as each "adopted" tenant's lease ends. 

Thanks in advance for the help

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[Nathan Hui]

Originally posted by @Brandon Roof:

The numbers have improved since your last calculation, but it may still be based on a number of assumptions.  I believe the 4% interest rate is going to be difficult to pull off.  Not impossible, but unlikely unless you've already locked in a rate with a lender.  Every percentage point will have significant implications.  A 5% rate would add another $40k to your 30-year mortgage.

We are also assuming that your additional $40k rehab budget it going to create $50k in value.  Again, not saying that this isn't the case but you'll want to be pretty darn sure before making that assumption.  This leads to the potential domino effect of raising the rents from about $513.75 to $700, which is a huge jump (almost 40%).  Your going to want to do a great deal of due diligence and confer with realtors, property managers and other trusted sources in the industry to confirm that the rehab investment will in fact lead to a return and that the going rate in the area for your type of unit can justify a $700 price tag, because if it doesn't, you're going to be in an even greater world of hurt than with your first calculation.

Lastly, some of your expenses shifted.  Some for the better, others possibly not.  Vacancy down, which your prior 6% could be borderline, let alone your new 4%.  Some of that is made back with the capex and repairs, which hovers at a much more likely 8% now, so that's good.  Insurance went down, which given the improvements you intend to make and increase in value, the insurance would naturally have to increase as well as it is now covering a more valuable property.  Management down is unlikely as well as your prior 10% is more typical across the industry.

On paper, this deal looks much better than it did before, but it is also likely to be much riskier than before as the changes may be predicated on a numerous dangerous assumptions.  Hopefully, some of these numbers are actual that you have received quotes for, such as with the insurance and property management.  Otherwise, you could be digging yourself an even deeper hole by moving the goal posts in order to make a nonviable deal "work".

I'd still very much consider moving on from this property barring a significantly lower purchase price and/or the ability to increase rents as you've proposed, but you would have to be absolutely certain that it's feasible.

Brandon, 

Let me start by saying I really appreciate your thoughtfulness and thoroughness. 

Here is the stuff I have nailed down.The interest rate is an actual rate. Actually, the lender told me 3.62% but told me to use 3.75% to be safe since it fluctuates. I put 4% which gives me some cushion with financing. Per the lender PMI will be $135/mo. He did tell me conventional financing would be a significantly higher interest rate. The insurance is an actual premium quoted for a 600k rebuild value policy that includes vandalism/malice/loss of rents/liability and so on. The taxes have been in the $1800s historically for the past 5 years and my calculations are assuming a 25% increase in taxes. The management company that currently manages the property charges a flat fee of 8% of rental income, no hidden fees. (I intend to manage myself but I calculate it in for the future)

Here are the things you stated that concern me most. ARV, that is the one wild card I am pretty concerned about. Sure I can drop 40k and raise rents over the course of a year. But will my ARV increase? Or will I spend 40k to get only 20k in equity. That would be a bad deal. This is actually my most unknown component. I don't know how to reasonable predict ARV. In my eyes the value of a multifamily property lies in its ability to produce rental income. So if I can raise the rent roll from $2100 to $2800, wouldn't that increase its value to other investors? I really need help with this part...

Rent raises. I have done some market research that I think really has some substance. I would love to hear what you think about it. This may be little long winded but this I essentially why I haven't walked away from the deal... Current/historical rent roll has been $500-$550/unit for this property. My agent who knows the market very well says he is confident the units would all rent for $600/unit "as-is". I actually agree with this and I think it is realistic. I am confident that the reason the rent roll is low is because of deferred maintenance and minimal involvement with the property. The current owner owns 200 doors and from what I can tell he is looking more for occupancy than he is looking for maximizing his rental income stream. He acquired most of his doors during the recession and had no need to increase rents in order to cash flow. This still isn't my hard evidence. 

Across the street there are two apartment communities that were built by the same builder of this quad during the 1970s. Arbor Terrace and Guest House Apartments. For both apartment complexes the two bedroom apartments have the exact same layout. Im not exaggerating, I will include pictures of the property I am under contract for and the ones from an actual Arbor Terrace unit I walked through yesterday. Arbor Terrace is asking $799 plus a $30 water fee for the exact same 2BR/1.5BA 1200sqft unit. They do have a pool, playground and gate. I definitely won't have that. Guest House also has the same unit in terms of specs however they include stainless steel appliances and include a washer and dryer. They get $925/unit for the 2BR 1.5BA. These apartments have waiting lists for people to rent. 

My plan is simple, provide a more updated apartment with a washer dryer and ask significantly less than across the street. I will include photos below. The first image is the property I am under contract for and the one below is the equivalent photo of an actual arbor terrace unit that will rent for $830. 

Quad Living Room (and my agent trying to convince me to buy the quad)Arbor Terrace Living RoomQuad Living Room Arbor Terrace Living Room (And my daughter) Quad Kitchen Arbor Terrace Kitchen Quad full bath (I can't fix the landscape) Arbor Terrace Full Bath

My estimations for 40k of renovations are high. My contractor is thinking more realistically that it will be around 6k per unit but I know things go wrong and I really want to make this quad competitive against the market so I can be selective in my tenant screening process. Also the exterior needs paint and repairs as well. I am confident that I can make my rental income projections, I just don't know if the price tag is worth it. My estimations on vacancy are based on the fact the these apartments across the street will likely be occupied and a prospective tenant will see that I am offering a washer dryer, nicer kitchen and bathroom for significantly less. 

Please let me know what you think! 

Thanks,

Nathan