52 Unit Multifamily: Buy or Bail?

Question

Love some feedback, thoughts, comments on this:

We have this 52 Unit under contract. It seems as though we are in a bit of a potentially unstable market when considering, Covid-19, Election, no evictions, population decrease in the county and state this is located. But the numbers still look solid....

Highlights:

52 units over 6 buildings. (46) 2 bed/1.5 bath townhouses and 6 apartment flat stye averaging 971 sqft. Brick exteriors, sloped, shingle roofs)

Gross Annual Rents: $408k ($654/unit/month). Gross Annual Expenses: $190k (prop taxes are $56k/year, trying to find out if they will increase substantially upon purchase).

Tenants Pay: Electric, Water, Sewer

Currently 100% occupied and we're told near 100% collections even though landlords are subjected to the no eviction order.

The Business plan: Purchase, cosmetic rehab 25 of the 52 units @$12,000/unit ($300k). Raise rents. Cash-out Refi.

With the property being 100% occupied, we will execute the 25 rehabs fairly slowly over 2-2.5 years and target the cash out refi in year 3-3.5 once rents have been pushed up.

So, the million dollar question: what would be a good price to pay for this property and should we buy it???

Other important notes:

- We tentatively have financing in place: 4.25%, 25% down, 20 year amortization, 3 year balloon.

- We only have $300k cash currently collected. Not nearly enough for both downpayment, closing costs and the $300k renovation budget (need about $1M).

- We have the option to buy less buildings/units if we can't secure financing for the complete purchase/can't come up with enough down.

-We have a seasoned/reputable Pm lined up to manage and we already own 40 units in the area over 3 properties.

Thanks all in advance for the wisdom and feedback!

Zane

Zane Belden · Answer

@Lee Ripma Thank you for weighing in! We are open to other partners including other syndicators, we just haven't gone down this road yet.

@Taylor L. Exactly. We've held off on going the securities attorney route but it may be time to and allow outside accredited investors in our deals.

@AJ Shepard I don't think they are actually getting 100% but they've been surprised (so have we) at how normal and strong collections have been despite Covid and the no eviction order. Thanks for running the numbers, overall, you're right on where we've been calculating. We are fortunate that we have the property under contract for $2.6m, so we would love to be able to come up with the full 1.1m to make it happen.

AJ Shepard · Answer

@Zane Belden

It’s pretty hard to believe that 100% occupancy is there.  Even common sense would say that if each unit turns over 1 time every 3 years you would have 1.3 units vacant every month.

Looking at NOI, at 195k (took off 5% vacancy off of revenue) and a 6% cap rate 3.2m is probably the top end of what you should pay for it.  A lot of fixed up properties are selling at 4-5% cap rates in our market.  Not sure what market you are in so tough to say.  At a 7 cap you’re getting a good deal, which would be 2.8m.

Say you take the rents to 800 which brings you a revenue of 500k which is about 100k more than what you were initially bringing in.  You could probably expect the refinance to come in at market +.5 percent cap rate for fixed up units.

So, NOI at 262k brings a value of about 4.8m at a 5.5 cap rate and proceeds from a refinance at 70% LTV should be 3.3m or so.

These are obviously rough numbers and also assuming that you fix up 100% of the units to achieve all rents at $800.

Partnering with another syndicator to raise the 1.1m needed to do the project might be a good way.  Or, just try to do it yourself and write in multiple extensions into the contract to give yourself time raise the money.

Lee Ripma · Answer

@Zane Belden

I’d partner with someone who has a larger ability to raise and can maybe assist you to get a better loan (you could do better).

Seems like you’ve got a nice value add deal. There is a ton of capital seeking yield right now and it honestly shouldn’t be hard to raise the money you need. So maybe a co-syndicator or another partner in the deal so a good one doesn’t get away.

Taylor L. · Answer

What Lee said. Partner with another syndicator who can help raise. You'll need to make sure you keep it compliant, be sure to work with your securities attorney to make sure you're keeping it legal.

Zane Belden · Answer

@Taylor L. Thanks for the feedback and questions!

$654 is the current average on these units. They aren't in rough shape but are in need of cosmetic rehabs. Newly renovated units on the same street in identical floorpans are getting $795-800, and are getting rented quickly. This is the exciting, value add portion of the deal.

We are syndicators, with our 8 unit and 24 unit deals having close friend and family as passive partners. But our circle of partners is getting a bit tapped out, thus only having $300k raised. We are certainly up for advice on the different options to come up with the remainder and what makes the most sense given our circumstances. Maybe thats a private loan, another syndicator partner? We're open to ideas because this seems to really pencil out well.

Thanks!

Zane

Taylor L. · Answer

Regarding collections: ours have been much better than I anticipated considering all of the current legal and economic issues you mentioned. 100% collections does seem a bit unlikely, but I wouldn't call it impossible. I would not bank on it though. $654 a month is pretty cheap for a 2 bed, no matter where you are in the country. Maybe this is the cheapest option and tenants know it?

Since you're short on capital is there any chance you could partner with an experienced syndicator?

Regarding price - the question for you is what price do you need in order to produce the return you want? You mentioned fixing up units and raising rents. What rents are you targeting? That is a critical piece of your anticipated return.

52 Unit Multifamily: Buy or Bail?

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