All Forum Posts by: Greg Scott

There are TONS of turnkey rental companies out there.  If you have concerns, don't buy.  Go look at some others.

Talk with your lender about this proposal...

  1) Get a solid quote on the roof replacement and share it with your lender. 

  2) Put the funds in escrow with your bank for the sole purpose of replacing the roof. 

  3) Close on the property.  

  4) Install the roof.  

  5) Get reimbursed for roof expense out of escrow.

Most banks are fine with something like this if they know their downside is covered.  They will probably let you close.

If the lease covered a leap year, would it be more than a year because it is 366 days?

It is probably much easier and safer to simply give 60 days notice for EVERY lease because you never know what a judge might say.  

I presume they had a kitchen sink, so the sink is not a relevant issue related to habitability. However, a unit without a toilet would not be considered a habitable unit in any state.

You did not give a lot of background information.  The rehab for this sort of thing should take about 3 days.  If that is the approximate time frame, then throw them a bone and move on.

If they have been unable to use the bathroom since the water incident because it was declared unhealthful, then it would have been much better to have made an insurance claim.  If you have the right insurance, both the repairs and lost rent would be covered.

The big-picture idea is correct.  I'll point out some areas where there are potential pitfalls.

The 6.11% cap rate is absolutely correct if the price is $5M and the NOI is $305K. The important question is "Is that NOI real?"

How do you determine the property should have an NOI of $400K without raising the rents? It is usually dangerous to assume you can cut costs. It is much safer to assume the seller has been cutting back on expenses to boost NOI prior to the sale.

"DSCR loan" is a term used in single family. Ignoring short-term bridge loans, most commercial loan sizing is limited by DSCR, but they are not called DSCR loans. Please work with an experienced lender to help you understand the right loan products.

There is an operational cost to raising rents that does not seem factored into your process.  To truly achieve higher rents, you often have to spend a significant amount upgrading units.  Even if your units are in great condition, most residents won't be able to afford a $200/mo increase in rent.  This means they will move out.  If you want to turn the property in one year, you are going to experience very high vacancy and much higher unit turn costs.   Either way, you had better have much more cash raised up front. (Many syndicators are selling at a loss right now because they did not account for these things.)  

On the typical value-add I've seen, people are pouring about $10K+ per door into upgrades. In your 80-unit example, that would be $800K. You will also have sizeable closing costs and working capital needs. I suspect you will need to raise a little over $2M from investors to properly execute this deal.

As a side note, 12 months is never going to be realistic on a full turnaround.  The best I've ever seen is about 18 months.  It will take you a month or two to get your feet under you.  Even if you turned 100% of the units in 12 months, the bank is still going to want to see a solid trailing 3 months of financials before determining your loan size.

Food for thought...

I would begin marketing immediately, and mention it will be ready the date that you have very high confidence it will be available.

The harder part is being selective what you show.  I would not put "before pictures" that are ugly, because people cannot unsee things and usually have no imagination about what it could look like.  By showing no pictures, people will assume you are hiding something.  

I am not opposed to people turning homes they lived in into rentals under the right condition.  I wouldn't do it in your case.

You have had a lot of appreciation.  Since it has been your homestead, you can sell the property, pocket the gain without paying capital gains. If you hold it as a rental for 3+ years, you have created a tax liability that did not exist before. Why not cash out while there is no tax?  

Another reason I don't like the plan is that focusing on cashflow ignores the fact that you are getting a terrible return on your equity.  You didn't provide the numbers, but I'll bet you have a lower ROE than the interest on a a 10-year treasury note.  For the risk of buying a rental property, I won't touch it unless I'm getting north of 15% ROE.  With $260K of equity to work with, you have tons of options to buy better deals.

There are three ways you usually remediate charring.  1) Replace 2) Dry ice blast or 3) Seal (but not with paint)

The spreadsheet you included is incomplete and insufficient for determining if this is a good deal or not.  Here are my comments on the analysis, not the deal.

We need to know the total dollars you are bringing to this deal.  You only show the downpayment.  You are missing the following:  capital improvements, working capital, closing costs, pre-payments, and anything else you will need to pay in advance.

You are missing several income and expense lines.  On the income side there are numerous things you could do to improve revenue but they are not listed.  You are also short on your expense calculations.  I would expect to see property management, admin, marketing, and contract services (more than just lawn care.)  You have an 8% vacancy factor, but does that include bad debt?  In my experience, economic vacancy is typically more than 8%.

Your NOI calculation is not correct. Since the valuation of an apartment is based on NOI, this is critically important. Get this wrong at your peril. Debt service is not part of NOI.

There is no calculation here showing your cash on cash returns, projected valuation, nor projected total returns.  I would want to see all of that before making a decision.

With respect to the deal, $35K per door is a very cheap price these days, so it could be a good price. However, $750/mo rent for a 2BR unit is exceptionally cheap, so it could be in a bad or depressed area, so that price may not be so cheap.

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