I came across a 12 unit (6 duplexes) deal in Milledgeville, GA. At first glance the numbers looked good. The seller was selling the package for $540,000. NOI is $57,239 , GR $75,550, EGI $70,270, Exp $13,031. (Current rents are ave $525.) The first thing I did was run the numbers and placed an offer for $600K with seller carrying 10% back and crediting $60K as a deferred maintenance fee (which I wanted to use as credit to buyers down payment). Seller was good with this. However, seller wanted me to see the properties while I was in town. I'm glad I was in town to see them because the area was a bit challenging. I didn't expect much because the average rents in the area are $620 a month. I stopped at a few stores and spoke to a few people that lived there. It seams that it is a College town and it didn't look like there were any plans for expansion. I mean nothing was going on construction wise. Because I couldn't find any information on the growth of Milledgeville GA I re-ran the numbers as if nothing would change for the next 5 years ($19K a year after Debt service). This is not bad considering I may get the property for $22K out of my own pocket. I needed to know a few things from the seller before fully committing so I sent this email. (Seller replied in bold)
Hey Larry (broker),
I drove out there today and I spoke to the lender(s) about the property. We have three ways we can close this deal. However, I will need help from the Seller and this is what I need:
- 24 month Rent Roll
2014 and 15 schedule e provided. He is getting 2016 schedule e. Hopefully that will suffice.
- What type of tenants are living there? (retirees/working individuals/Section 8 there were a lot of people home for mid day on a Thursday)
Working individual. Obviously at a lower income level given the rents.
- Have any of the tenants been late more than 2 times within the last 12 months?
Yes. There is a $5 per day late charge.
- Have you had to evict any tenant within the last 24 months?
Yes 2425A evicted about 4 months ago. Went up from 525 to 600 with new tenant
- Can you provide documentation proving the expenses are $13K for the last 12 months and a report for the 12 months before?
2014 and 15 Schedule E provided. Getting 2016 Obvioulsy taxes will increase after the sale based on new price.
- Age (meaning how long they have lived there) of each tenant.
2425A 3 months
B 3 yrs 6 months
29A 2 yrs 3 months
B 1 year 6 months
33A 8 years 1 months
B 4 months
64A 1 yr 3 months
B 2 yrs 2 months
68A available lease pending
B 3 yrs 5 months
80A 4 months
80B 2 years
My biggest concern is my exit strategy. It doesn't look like Milledgeville is looking to expand anytime soon. However, I do plan to hold it for a while so if the numbers are true (or close) we can make this happen.
My lender said he can do a commercial loan for 20% down but the seller could not carry a 10% note and I could not use the $60K deferred maintenance fee as credit to my down payment. He also said he can do the deal with private money at 30% down or do it as a residential loan with 15% down.
I feel like this deal was too big of a risk based on the present information and the fact that this would be my first multi-family deal. I really would prefer a 30 to 60 unit deal as my first deal because I feel that being 85% occupied would still allow enough cash flow to pay the bills. What do you think about this deal? Do you think the lender I am using is accurate with how the deal can be done.
