All Forum Posts by: Account Closed

I think that you should approach this from a residual point of view.

Look at what you are wanting to create and the cost to get there. Make sure you include all your cost, both soft cost and hard cost along with some sort of development fee. Exclude the purchase price.

Then value your completed project against industry standards for that type deal you have created. 

Subtract your cost to get there and what is left is the residual value of the current building and land. 

I am not saying that is a fair price only that it is the most you should pay given your plans for the property. You may find that the Highest and Best use is to continue to operate it as a dumpy motel.

Wow and congratulations, 

Your numbers appear about right on the construction, but my guess is that you will need to get actual bids for many of your expenses. For new investors, insurance can be very expensive so you might want to consider getting a property management company involved as they can help get lower rates. ( I know - cash flow trade off)  For larger properties with on-site management, current expenses in Texas are in the $6,000 range for new properties, remember that your Tax rate will be around 2.85% of value and the County Appraiser knows what it cost to build. (ie $115,000/unit value will be about $3,200/unit).

As for strategy, I would have the seller throw in the lots to the partnership. You are probably looking at a loan of less than 70% so that if your cost is $115,000 a unit, you would need about $34,500 in equity per unit. His land would count to the equity so your out of pocket would  be significantly less. Additionally, the land is valued based on appraisal which may be higher than your proposed purchase so that the land equity may be even greater.

T3 are usually shown because the property has had significant changes in either expenses or income and they are trying the sell the property on proforma. You can do a lease audit to recreate the income but many times the seller would have you believe that the T3 accurately reflects expenses. i would rebuild my expenses by getting copies of annual utility bills, insurance, taxes, and service agreements. If you compare those to the T# expenses, you should get a good indication of how well the T3 reflects property operations.

I think the bigger question is, if the seller does not have them (or will not release), then you have much bigger problems.

The problem is not just finding the sales price, it is almost impossible to find out actual NOIs.

 Cap Rates are individual to each buyer, each buyer makes different assumptions and so if you ask the buyer and seller what the cap rate was, you would get 2 different answers.  When all investors strategies are accumulated, then you have what is called a "market Cap" which reflects the overall sense in the market. I will caution you in that many of the Cap rate that you see published reflect investment grade properties (ie institutional buyers) so that for smaller properties the "delta" is very wide.

My suggestion to you is that you develop your own cap rate requirement (equity vs debt - see band of investment analysis) and then apply that to each prospective investment. Those that meet your criteria, you can explore more, those that do not, you can discard. Simple but effective. If you find that you are not getting any deals, then your model may need refinement.

Doug

Are you wanting to underwrite for lenders or for investors?

Most investors look more for a due diligence type review vs just number crunching. I would bundle your service with a full spectrum review and team up with other DD providers to deliver a complete package as a service.

Some lenders do outsource so you might try that, lastly check out Clayton Group? They are one of the largest outsource and they hire sub contractors which might help you build a reputation as well as be informative.

Since you are looking to do long term rental, you might need to really assess the real cost of construction.  Building for sale product is very different financing criteria than for rental.  I realize that you work for a builder and you might be able to save some money but lenders look at market cost as a guide.

If you do for sale product, explore pre sale situations so that when you approach the lender you can show a viable exit. You could also look to do an investor turnkey type deal. Either way, your ltv will be much lower than existing.

With $100,000 you might be looking at $500,000 in existing property where as with new construction, you might be in the $300,000 range. Construction cost, land, carry, lease-up etc will mean that even a really cheap deal would be over $100,000 per unit. With $300,000 you would only be able to do three units. Existing property might yield you 10 good units which will be a lot easier to finance and provide a better return on your investment.  

Lastly, if you do have some land, you could phase in the building by building one duplex, leasing it and then refinancing and then doing another and so on. 

We currently are building 8 duplexes on a for sale basis and have pre-sold 3 units which made our financing a lot easier.

Taylor; Do not know if you can navigate to here 

https://www.biggerpockets.com/files/user/AHCCapita...

but there is an investment template for apartments that might be helpful.

If not - go to the file section of BP and search "Apartment Investment Template"

Sorry I was thinking faster than I can type. So here a second attempt.

If the new building replacement cost is $300/sqft then 1% is $3.00/sqft. You stated that there is 12,000/sqft per floor and 10 units per floor so that the average unit is 1,200/sqft.

At $3.00/sqft times 1,200/sqft per unit, the annual replacement cost reserve would be $3,600 per unit.

Hope that helps

what I was trying to say is that, most times when investors acquire a property, they usually invest addition monies to repair and improve the property. Most investors see a curtailing of returns/yields around the 7 year mark as repairs start to increase. The usual choice is to sell or refi and reinvest in improvements.

I am all for creating value through rent increase combined with delivering value to your tenants. Your PM is probably right that you current tenant profile may not deem your renovations a value and hence rent increases may be difficult.  If you seriously want to re-position the property, you should plan on having a complete tenant change. There are ways to do this efficiently but doing only a couple of units per year usually does not work.