I am in the process of listening to the entire series of the bigger pockets podcast(thanks @JoshuaDorkin and @BrandonTurner). I recently listened to show 47 w/ @JoelOwens and was intrigued by some of the math he implemented in evaluating multi-family rentals. I live near Baltimore, Maryland (in Havre de Grace, Maryland) and near me, is a unit which is interesting to me. Its list price is much too high (I believe) but would love some feedback on the home itself. Additionally, I'd love if anyone could help me to make sure that my math adds up correctly.
The unit is 6 unit multi-family(which if I'm not mistaken crosses a threshold into apartments from a multi-family home) built in 1830 which is fully leased. I know that Maryland is strict concerning lead-paint certifications but the listing indicates "lead paint certificates on hand." The exterior of the building is very attractive and though I haven't yet toured the house (I don't know if it going to be worth my or an agent's time) the pictures online seem to indicate that it wouldn't require much more than cosmetic work inside. The neighborhood and schools, while not the best in the county, are far superior to many dangerous neighborhoods and schools in Baltimore City. I live less than 5 miles away and it is a nice town that we hope to be up and coming in the future (I am not counting on appreciation at all, but the potential is there). It is near Aberdeen Proving Ground (APG), a military base which provides a wealth of job opportunities in the area.
Some of the downfalls of the place are that it offers only street parking (but has a large fenced in yard, which I would consider turning into parking, however, street parking is common for the area. One improvement I would potentially want to make to the building as a whole is to add central air conditioning. I would imagine, given the building's age, that it would need to have the duct work put in to accomplish this, which would have a steep price tag. I would also imagine I would need to restructure the lease agreements with the tenants (potentially losing most if not all) to adjust rents (which I will address later) and because currently the owner is footing the bill for utilities, something I would not be looking to do. And, assuming the worst and that the units aren't on their own meters, that could represent another expense.
Now down to the math. As I mentioned before it is a 6-unit building. It has 4 2-bedroom units, and 2 3-bedroom units. I would be interested in examining the entire layout of the interior to see if there would be room to restructure these apartments in order to add a unit, or find a way to get them to generate additional income. Comps I have seen on apartment rentals seem to be in the 800-1000 range for 1-2 bedroom apartments and I haven't seen any 3 bedroom prices. Currently, realtor.com indicates that the building is bringing in $4,600/month gross rent ($55,200/year) and that expenses are $14,327/year. I can only assume that the $14k number is simply the costs of utilities and that other expenses are not being calculated.
According to the math from biggerpockets.com/show47:
First of all, I want to mention that I am not sure what the cap rates are in the area, nor how to find them out. So, I'm going to plan for wanting a 10% cap rate and then I could adjust accordingly.
The original list price was $569,000 and now after approx. a year on the market, it is down to $474,900.
$55,200 (gross annual rent) x 40% (60% operating expenses) = $22,080(net rent) x 10 (10% desired cap rate) = $220,800 seems like the price that would make sense at the current rental rate (again, please check my math).
$55,200 (gross annual rent) x 40% (60% operating expenses) = $22,080(net rent)/$474,900(list price) = 4.6% cap rate.
So working backwards,
$474,900(list price)/10 (10% desired cap rate) = $47,490 (desired net annual rent) / 40% (60% operating expenses) = $118,725 (desired gross annual rent) / 12 (months) = $9893.75 (desired monthly rent)
That means that to purchase at the current list price, I would probably need to increase rents by an average of 2.15 times in order to achieve a 10% cap rate.
While this overall deal may just not exist as a deal, I wonder if anyone has suggestions on how they would deal with a property whose numbers don't quite add up but could potentially look good with some tweaking.
I also didn't add the costs of repairs to the total purchase price so that price would have to be assumed to have been negotiated down so that my purchase price + repair/upgrade costs = $474,900 or the $220,800 if rents couldn't be improved.
Finally, I'd like to do some calculations based on what an actual deal would have to likely look like in this place.
I think the rents could easily be negotiated up to $6,000/month (gross) and the utilities negotiated out. That being said, that is not nearly enough to account for the current list price.
$6,000 (gross monthly rent) x 12 (months) = $72,200 (gross annual rent)
$72,000 (gross annual rent) x 40% (60% operating expenses) = $28,800 (net rent) x 10 (10% desired cap rate) = $288,000 (purchase price + repair/upgrade expenses)
I apologize for the exceptionally long post here. I hope to hear back from some people concerning my math, to make sure I have it right and about any thoughts they have on the whole thing.
Thanks
Andrew Bertram
