Deal Analyis #4- New Haven, CT 06511
I haven't written a blog article in awhile, been busy posting in the BP forums instead. But I found a property I'm optimistic about, and this article is meant to help clarify my thinking on the potential of a deal.
Location Information
The property is located in New Haven, CT. The town is well-known as the home to Yale University, however it has also acquired a reputation as being a war zone. As it turns out, that may be changing, since 10-year crime stats are down by 45% (i.e. a crime index of 427.6 in 2018 vs 769.9 in 2009). (sources here, here, and here).
Connecticut has some of the highest property taxes in the country- 2.289% in New Haven county. This (along with the aforementioned reputation for crime) may deter some investors from looking at the area more closely.
New Haven vacancy rates appear reasonable- around 8%. That's less than I usually budget for (10%).
The neighborhood of Newhallville, where the property is located, has a median income of $49,000. This is decidedly blue-collar, but is 25% higher than that of New Haven as a whole.
Property Information
This is a 6-bedroom, 3-bathroom, 3-unit multi-family property I found on the MLS, which also contains a commercial space on the ground floor. I checked the county assessor's records site, and the property's square footage and bedroom/bathroom counts all matches up with city records. Additionally, the unfinished basement (1,500 sq ft) is not counted as part of the square footage. By finishing it, there's the potential to increase the square footage and therefore the property value.
BiggerPockets Report Walk-Through
Property Taxes
I mentioned Connecticut's high property taxes already. Realtor.com lists $6,800 per year for this expense. Just to be safe, I'll budget $7,000.
Purchase Price
This property is currently listed at $179,000. It's been on the market for 136 days, so part of my strategy would definitely be to offer less than this. But for now, I'll start with the listing price.
After-Repair Value
Again, I'd definitely want to finish the basement. There isn't too much room to expand the property's footprint outward, since the building square footage is 4,000 sq ft and the lot size is 3,049 sq ft. So without subdividing the interior of the house into more bedrooms, there appears to be limited value-add potential in terms of expanding the property. But there is potential in terms of increasing its quality, both inside and out:
As you can see, it needs a lot of work. At the very least, I see a need for completely new kitchens and bathrooms in each unit, new paint (interior and exterior), new doors, drywall patching (as in the last photo above), new appliances, new windows, and more. The storefront area would need a more extensive renovation in order to convert it to a residential space. Although it likely already has electrical, plumbing, and HVAC installed, these ma need to be updated. The hardwood floors have potential, but they'd need a touch-up as well. This is just what's visible in the above photos. It'd be safe to assume that other work is needed as well, potentially including big-ticket items like a new roof, foundation repair, etc.
After-Repair Value
I want to be conservative here, since the comps I found are kind of all over the place. Some comps show $50 per square foot, while others show $80+. The current price per square foot of this property is $179,000 / 3,905 = $45.83. The value of the finished basement space will not be this high, so if I estimate $30/sq foot for that space, then our new ARV is $179,000 + (1,500 * $30) = $224,000. To err on the safe side, I'll use an ARV assumption of $216,000.
I'd only want to take this step if the new price-per-square-foot of the improved basement came in significantly higher than the total cost of making the improvement. So if the cost came in at $40/sq ft, then the new price/sq ft (including a healthy margin of safety) should be around $50/sq ft. That $10/sq ft difference would add about $15,000 to my ARV, since the basement is 1,500 sq ft according to the assessor's report. However, basement prices per sq ft are usually less than those of above-ground square footage, because even finished basement space is less-attractive than equivalent above-ground space.
Estimated Repair Costs
This is the toughest part to estimate without touring the property and getting an inspection. My trick in doing this with past reports has been to err on the side of over-estimating, and that's what I'll do here with an estimate of $65,000. At least, I hope this is an over-estimate.
One thing I'm curious about is whether to transform the commercial space into another residential unit. I know even less about renting to businesses than I do about renting to individuals, but I'm wondering which alternative would yield more rent. I think I've heard somewhere that businesses tend to be more long-term tenants, but that vacancies are harder to fill. I'll make the assumption that I'm successful in converting this space into purely residential, but make note that this is one of the biggest risk factors in my analysis.
Among the changes I want to make in the rehab, I want to ensure that all 4 units have separately-metered utilities. That will allow me to bill each tenant separately for these, as opposed to me having to pay them. I'll refer to this change below when talking about fixed and variable landlord expenses. For what it's worth, here are the typical utility charges I found for Connecticut- about $343/month just for electricity, water, and gas.
As I mentioned before, I'd like to finish the basement in order to add livable square footage to the property statistics and therefore increase its assessed ARV. I Googled around to look at how much it costs to finish a basement, and it's surprisingly expensive. Prices listed in this article range from $35-90 per square foot! My assumption above in terms of ARV is that it adds $30 per square foot, but if it costs $35 minimum to do so, then this plan isn't worth it and I'd need to remove both this expense and this ARV increase from my assumptions, and re-analyze the whole deal. Something to keep in mind.
Purchase Loan Details
Acquisition Loan
I've previously received a quote from LendingHome (a hard-money lender specializing in rehabs) for an 85% LTV loan on principal, with 100% of repair costs covered. I'll therefore assume a principal loan amount of $152,150 and a rehab loan amount of $65,000. So the total loan amount would be $217,150. LendingHome's interest rate was 9.5%, with 2.85 points charged up-front. This is an interest-only loan with a balloon payment due after 12 months, and no pre-payment penalty. I'm assuming a loan period of 6 months, after which I'll complete my seasoning period and be able to refinance. I'm anticipating a rehab time of 4 months, after which I'll be able to start renting.
Refinance Loan
I'm initially going with a refinance amount of $151,000, which is just under 70% of the ARV. I'll also experiment with different refinance amounts, in order to optimize the relative effect on cash-on-cash return vs. cash flow. I've previously received a quote from USAA for an investment loan at 5.8% fixed interest with a 30-year amortization period. I'll likely keep shopping around, but this is a good data point to start with.
Income Section
For "Total Gross Monthly Rent", I'll turn to Rentometer.com rent comps. Rentometer is telling me that the median rent for a 2-bedroom property near mine is $1,200. If I successfully turn the commercial space into a 2-bedroom residential space (a big assumption until I tour the property and speak to a contractor), that gives me a monthly income of $4,800.
Another option I have is to furnish the units, and list them on Airbnb, or on FurnishedFinder.com's TravelNurseHousing site. The City of New Haven appears to have adopted licensing rules for short-term rentals that are favorable to investors. If I were to rent all 4 units on Airbnb at a nightly rate of $94 per unit (which I found to be substantially less than the average revenue of $117/night that I found on AirDNA), and assume an occupancy rate of 75%, this translates into a monthly revenue of $8,460. That's not including the much-higher fees for property management (around 25-35%) that I'd encounter with a high-turnover business like an Airbnb listing, but it's still almost double what I estimated earlier.
I have 2 years of experience as an Airbnb host / house hacker in Brooklyn NY, so I'm comfortable with things like preparing and staging the unit for listing, writing an effective property description, managing remote co-hosts, dealing with guests via the mobile app, etc. I've not yet listed a property with TravelNurseHousing.com. Travel nurses tend to stay much longer than Airbnb guests (12-13 weeks vs. 4-7 days), so the property manager's workload would be less. The property is 12 minutes' drive away from Yale New Haven Hospital; that proximity would be a bonus to travel nurses.
Whether I decide to rent on Airbnb or TravelNurseHousing, one caveat with this plan is that I'd have to fully-furnish all 4 units. This means I'd have to increase my rehab/make-ready budget by approximately $7,500-$10,000 per unit. That's entirely doable if the revenue projections are accurate, since I'd break-even on that $7,500-$10,000 in 2-3 months.
A third option I'd have is to open a laundromat or something similar in the commercial space, rather than convert it into residential. That would (hopefully) produce more income than I could earn from a tenant, and laundromats seem like a relatively low-maintenance business (the machines can be rented and can be outfitted to use pre-paid cards instead of coins or cash, and the labor involved seems to be mostly maintenance, cleaning, and security). It would also potentially reduce my rehab costs, since it would no longer be a full commercial-to-residential conversion. Also, having a laundromat right downstairs could be a selling point to the other tenants. I don't see any laundromats in this vicinity listed on Yelp.com. This could either indicate an opportunity, or a potential lack of demand in this area (which would obviously throw a wrench into this plan):
Fixed Landlord Expenses
I mentioned earlier that my goal is to meter each unit's utilities separately. So I'm not budgeting for electricity, gas, water & sewer, or garbage. There are no HOA fees to account for, and no PMI since I'm leaving 30% of the ARV in the deal. I'll budget $200/mo in miscellaneous expenses like snow removal.
Variable Landlord Expenses
My usual process is to budget 10% each for Repairs, CapEx, Vacancy, and Property Manager. Again, if I went the Airbnb route, I'd need to bump up my PM budget to 25-35%. But for now I'll assume I'm going the regular tenant route.
Future Assumptions
I have a usual process for these line items as well- a 2% assumption for income growth, property value growth, and expenses growth, and a sale expense of 9%.
Summary & Report
This deal has a big con- $244,000 total project cost with an after-repair value of $216,000. If this were purely an appreciation play, I'd walk away immediately. But I do see one big plus to it, as well- initial cash flow of $302 (10.99% cash-on-cash return) during the pre-refinance period, and a cash flow of $1,434 (cash-on-cash return of 11.46%) post-refi. Cash flow means I could sit on the property (actually, I'd need to do so) until I either recouped my project cost or the property appreciated to a breakeven point. That's not an ideal situation, but if I can reduce my purchase price and/or rehab costs, the time needed to recoup should be shorter. I need to confirm with a local expert about the feasibility of these numbers, then I'll know more. But I'm cautiously optimistic with this one.
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