Analyze this deal: 40 unit MFH

[Will K]

Two separate properties for a total of 40 units, all 2br/1ba.

In a C-/D location of big city in the south. Average rent of all 40 units is $450/mo with $450 deposit. Tenants pay all utilities except water. (what average water cost assumptions do BPer's make?) Asking price is $480,000, was thinking of offering $450k. Would have it managed by a competent property manager.

Assumptions:
Management fees: 16%
Taxes: 3%
Vacancy Rate: 75%
Maintenance: 10% of rental income
Insurance: 0.8% of purchase price
Misc Property Upkeep: $100/unit per year

Money down: 25%
Inspection fees: $10,000
Improvement fees: $10,000
Closing Costs: $25,000
Total Money Down: $172,000

Going off a 60%/40% expenses to NOI ratio, I see an $81,600 NOI, and after the $20,000 annual debt service I would get a $61,600 cash return. This gives me a 36% cash-on-cash ROI. The property has a CAP rate of 23%.

Seems like a great deal, but the only catch is this would be my first property, and I live a 2-hour plane ride away. What does BP think?

[Joel Owens]

Will you have no clue what you are about to get yourself into. Please do not do this as your first deal.

If it's at 75% occupied a regular lender will not touch it. The reason is it could just as easily go to 50% occupied and become a short sale or foreclosure as soon as they have made the loan.

The fact that you are a 2 hour plane ride away trying to take on a property like this with little to no experience in a value add will make a regular lender run. ( I am assuming this based on your post but I apologize if I am incorrect ).

If you use private or hard money you will have a very high debt service to carry compared to conventional lending. I am betting you will find that if occupancy is at 75% that many are not paying or are only partially paying.

If 450 a month is market for that area occupancy should be close to 100% so that shows the property is in serious disrepair or the asking rent is too high for the area and rents have shifted downward with others buyers purchasing for a lower basis and lowering rent to fill up fast.

You have to track the occupancy for at least a 12 month period. Has it been at 75% consistently over 6 to 12 months with low turnover and rents being paid on time??

I analyze a bunch of properties and I am sure there are hidden time bombs waiting to be discovered.

Regular multifamily lenders want 90% occupancy or greater stabilized over time.

If tenants do not pay for water I go by 60% costs instead of 50% because they use on average 30 to 35% more water and DO NOT report leaks as they are not paying for it !

So let's assume 40 units at 400 a month for fast lease up to quality tenants.

16,000 by 12 = 192,000 gross income

Back off 60% costs (vacancy, property management, operating costs)because of the rougher areas you are looking at cash flow more so than anything else.

Figure maybe 5,000 per unit average to update and exterior if they haven't been gutted. If they have double that figure once you get the other tenants out.

192,000 -115,200 ( 60 % ) = 76,800 NOI once stable and fully rehabbed.

At a 10 cap which most rougher areas might trade at a 12 but let's do best case you have 768,000 resale value.

If you pay 450,000 and then have 40 units by 5,000 improvements that is 200,000.

Resale of 768,000 minus 6% commission 46,080 = 721,920

Figure title work , buyer concessions ,etc. maybe you are at 705,000

Take 705,000 net minus your 650,000 in you are looking at 55,000 profit and that is IF the buyer isn't asking you to take back a second mortgage of 10 to 15% and then your profit is gone.

The key on this deal will be immediate repairs needed and if the area is really rough it won't make a difference how nice you make it the quality tenants will stay away and the new tenants will thrash your rehabbed units again.

To me I just don't see this as a deal unless there is land involved but if the area is rough the redevelopment would be weak unless the government was coming in and buying stuff up with grants to revitalize.