Thoughts on this MFP Deal?

Question

Looking pretty hard at a 10 unit complex on a half acre which I can get for $15k/unit. The units are a mix of 1 room and 2 room stand alone buildings. All houses are brick exterior, tile interior. All are individually metered. Landlord pays water, insurance and gabage. Each rents for between $450 and $550. The property was badly managed and I plan to work to reposition the property. I plan to use a property manager, but I am not sure what to assume for a PM's fee on a property at this price point/demographic. I assume that I will need to put $50K of renovations $5K per building over the next 2-3 years and I plan to pace myself and fund as much of this as possible. My assumption is that for this area my renovation will increase the average rent from $500 to $550, and will reduce the vacancy rate and repair burden for the complex.

So assuming that I have an acquisition cost of $15K/unit and all units are currently in a rentable condition. I see some value-add in the additional $5k/unit in renovations is there something else I should consider before I jump in?

(Please assume financing is not a concern as I am more looking at deal economics at this point)

Joel Owens · Answer

I looked at your other post. You state the bank owns the property. 8 of 11 units rented. I don't count anything the PM says in these situations. A bank takes over a foreclosure and does what I call "puffing" which is filling up the units fast to show occupancy to try to increase the value of the foreclosure sale. The problem is the tenants might have occupied for 30 days or so and a stable occupancy model has not been proven. If the bank filled up and the occupancy has been stable for 6 months or longer and they can show payments on time with the books that is another story. I already gave my opinion that I would not touch this deal. Don't talk yourself into a deal and get excited about all the fantasy rent return the PM is putting in your head. If you are set on buying this I would drive the price per unit down much lower say 5k to 6k a door.

Tom C. · Answer

Built in the 50s. 8 of 11 units currenlty rented and all "rentable." Master water meter, individual gas and electric. There is a 15 space parking area that I will probably want to repave and potentially wall the property off from the street. A small church accross the street, most houses in the general vacinity are pretty run down. I got comps at the nearest appartments and most are a little bigger and rent for more. I spoke to a PM today and she said she thought that I could qualify the properties as Section 8 and get the rents to $700, but maybe a little more on the renovation side.

Joel Owens · Answer

When you say individually metered do you mean gas, electric, and water?? By your post where it says landlord pays water I assume you did not mean the water is sub metered but electric and gas is. You do not want to pay water unless every other landlord in the area does so. If it is not common for the area then you need to have them pay for it and bill them directly from the water company. When landlord pays water the tenants do not report leaks and use on average 30 to 35% more water because they don't care.

Joel Owens · Answer

Let's take 450 to lease up fast after rehab. Is the property already vacant?? If tenants are present you will need to factor in further loss of income time getting them out and damages to the units. The ones already vacant you can estimate the condition unless they are broken into more after buying. The tenants still there you can't assess the full damage until they leave. 450 by 10 is 4,500 monthly X 12 = 54,000 LANDLORD paying water is a major concern. Look at if the water and sewer rates per gallon have stayed flat, gone up, or gone down the last 5 years. Water (liquid gold) you are looking at 60% expenses and not the typical 50%. 54,000 x .60 = 32,400 = 21,600 NOI At a 10 cap you are looking at a value of 216,000 for resale before commission costs and buyer concessions. At purchase of 150,000 and projected repairs being more 50k I don't see the value in this deal. If you were picking up 700 or 800 a door potential for 20k that is different. How old is this building?? Can you sub-meter water?? Replacing the galvanized water main can cost tens of thousands of dollars depending on the run. How bad of an area is this?? If you rehab nice in a crummy area the good tenants still will not rent there. Are there large trees close to the property?? The root systems can damage pipes and lift up sidewalks and crack the slabs in some of the units.