All Forum Posts by: Jared Schaefer

Thank you! And your feedback helps immensely as I don't want to miss anything or come across any major surprises if I went through with this deal. So thank you for that also.

The total rentable square foot of this building is 5312 sf. This is 8 identical 2/1 units that are all under one roof that are 664 sf a piece. This brings the rent/sf to $91.30 at the seller's asking price.

The more I've been going over this deal, the more I've been seeing that the asking price is still too high for this area. 

Gross Margin/Rentable Earnings

1) I ran my numbers based on a 5% vacancy. Would you always factor in a 10% vacancy on your initial analysis on a deal like this? 

2) The length of the turnaround time is also something I've realized has had to change from my initial analysis. The "less than a year" route is too expensive and too risky. I agree with stabilization taking place in the 1-2 year range especially given the circumstances you mentioned.

OPEX

1) I've factored in a 10% management fee (to be conservative) in my numbers.

2) Taxes that are to be paid this upcoming January are $6328 for the 2020 year. Thank you for bringing the Harris county tax increase tendencies to my attention. Based on what you said and if my calculations are correct, I should account for taxes to increase by around $3,500 in the next year or two.

3) Thank you also for pointing this out. The plan is really to get new renters in each unit asap instead of just keeping the same tenants in each unit and hoping they would be able to pay the increase in rent and utilities. 7 out of the 8 units are month to month. Despite that plan I will now base assumptions more conservatively on being able to implement RUBS or a rent increase instead of both at the same time.

Financing

1) This a very good point. If the seller wants to stick to these terms it makes the owner financing option not make as much sense. It sounds like a great idea in theory if the terms were more favorable.

Do you also calculate your valuations based on the cap rate for the area? I ran these numbers based on a 7.5 cap but perhaps I should have run them at an 8 or 9 cap for that area in 77022?

Thank you so much for all of your valuable input! I am definitely going to take it and apply it to my deal analysis in the future.

I agree with the interest rate being too high with 40% down. 

Also you're right! I ran all of my numbers with $1962/month until I made this post. Not sure what I looked at that gave me that other payment amount, but thank you for pointing that out and I will go in and update my post to reflect the correct owner finance payment amount.

In my analysis I accounted for 5% vacancy but after seeing your response here, I may raise it to be more conservative. 

The expenses from what the seller has provided to me come out to a total of $18,260. With him doing repairs, self-management, and having a discount on insurance due to having multiple properties it brings his expenses down a little. 

Water/sewer- $2970

Trash (estimated)- $360

Electricity- $1262

Repairs/Maintenance (estimated ~8% of effective gross income)- $4340

Insurance- $3000

Taxes (to be paid in Jan 2021)- $6328

I ran my analysis with 10% property management, a slight increase in R&M, lawn maintenance, and an increase in insurance bringing total expenses to $26,388.

Maybe there's more to it, but I thought that by owner financing a large chunk of the deal, the seller would save on reported income for the year which would save him some in taxes? Either way this deal will not happen unless title is clear with title insurance with an updated survey, so I agree with you there.

I was able to talk the seller down from $510k to that $485k number but the more I look at everything and bounce ideas off of other investors, the more it seems that that $485k needs to come down even more to make sense of the deal.

Thank you for your response!

Alright. Grab yourself a fresh cup of coffee for this one. In this post, I tried to give the necessary info while trying to make everything as simple as possible, but this is longer than your average post. Read til the end and let me know what your thoughts are. Hope you have your coffee ready and thanks in advance!

I had an 8-unit apartment building brought to me that is off market in the Northside/Northline area (77022 area code) that I am wanting to make sure my analysis is correct on. This is a mom and pop run building where the owner did the management and repairs himself over the course of ownership in the last 8 years. The property is in decent shape with no major issues, and the owner also has not increased rent in several years where each is getting $600/month. Market rent is $700/month with doing little to no work to the property, and can get around $800+/mo per unit with $75,000 in rehab costs. This is the first of several of his properties that he wants to unload so that he can retire. He is willing to Owner-Finance the deal in order to save on capital gains taxes. This is a wholesale deal where the seller was asking $510,000 but I've talked them down to $485k. Here are the numbers based on actual expenses:

8 unit building (77022) 100% occupied

Purchase Price: $485,000

Seller Finance terms: 7% interest rate amortized over 30 years w/ balloon payment at the end of 5 years with $190,000 down

              --$295,000 owner financed at 7%= $1,721/mo or $20,652/yr

              --$190,000+$75,000 Rehab= $265,000 in Hard Money/Private Money/JV    

Current Rent: $600/mo [$57,600 annually]

Market Rent: $700/mo (w/ less than $5,000 in repairs) [$67,200 annually]

After Rehab Rent: $800+/mo (w/ $75,000 in rehab costs) [$76,800 annually]

Expenses: $26,388 annually (includes 10% property management, insurance, repairs & maintenance, utilities, and taxes)

      Reserves: $2,400 annually ($300 per unit)

NOI after Reserves at Current Rent ($600): $33,590

NOI after Reserves at Market Rent ($700): $39,010

NOI after Reserves after Rehab ($800): $49,644

Cashflow after debt at Current Rent (not including Hard Money/Private money) = $12,938 annually or $1,078/month

Cashflow after debt at Market Rent (not including HM/PM) = $18,358 annually or $1,529/month

Cashflow after debt after Rehab- 2 Phases

                     Rehab Phase (1st 6 months): (including Hard Money + OF at 6 mos= $15,768+$10,326)= -$1500 to -$2500/month or -$9,000 to                           -$15,000 total for estimated first 6 mos. ( OR worst case scenario-- -$26,094 or -$4,349/mo for a total of 6 months with no rent                          at all)

                     After Rehab Phase (last 6 mos. with $800/month rent): $38,400-[$10,326 (6 mo. of OF payments) + $13,194 (6 mos of expenses)                       = $14,880 for 6 mos. or $2,480/mo. 

                    Refinanced at $2697/month- $2,480/month (cashflow from line above) = -$217/month for the remaining 6 mos. of the 1st yr                            after rehab

                          Refinance Details: NOI of $49,644 (from above line of rent @ $800/mo) at a 7.4% cap = $670,865; 75% Bank Refinance of                                    $670,000 = $502,500

                           $502,500 - $265,000 (Hard Money Loan) = $237,500 (this can pay the seller-owed amount of $284,674 down to $47,174 which                              equals ~2 years of payments of $1721/month)                           

                             **Refinance is based conservatively at a 5% interest rate and at a 7.4% cap rate which is typical for the area

Year 2 Cashflow after Rehab and Refinance + Owner Finance Payments: -$217/month or -$2,604 annually (eat into Reserves to break even?)

Year 3 Cashflow after Rehab and Refinance + Owner Finance Payments: -$217/month or -$2,604 annually

Year 4 Cashflow (Seller is Paid Off early from Refi plus 21 months more of payments): $17,280 or $1,440/month

Year 5+ Cashflow assumed to increase incrementally with market

So, as I typed this summary of an analysis up I realized that going the route of using a Hard Money Lender and doing a full rehab of $75k at these rates is all but a deal killer because of putting me in a situation of getting through the first year of negative cashflow and the next two years of just about hopefully breaking even on cashflow. It appears that I can immediately increase rent with little to no (maybe $5,000-$10,000) of repairs. This is why I went back and italicized all HML calculations as you can see above to deem them as optional. This summary of my analysis has made me realize that I most likely will have to have a partner (or two or more) with the down payment amount to make this deal work. This of course being without a major $75,000 rehab up front.

What are your thoughts on this deal? Would you go the Hard Money route with a major rehab up front or would you do a partner up with an equity partner with all or most of the down payment to make sense of this deal? Would you change the terms and lower the asking price or is everything good as-is?

@Mike Morawski that sounds great. I will definitely be joining you guys. Thanks for your help!

Thank you for your responses @Mike Morawski and @Percy Matsunaga. We have decided to charge our contractor the full $850/month and have him separately invoice us for repairs that we agree to have completed. We definitely see how important it is to keep all of this separate and clear between us and our maintenance man in our situation. It would be one thing if we had a 20+ unit property like you @Mike Morawski and employing a full time maintenance man (and we will too in the future), but this will do for now. Thanks again for your help!

My wife and I just purchased our first fourplex and currently have 1 unit vacant. My maintenance guy is interested in renting the vacant unit out for a discount in exchange for maintenance services. Have any of you done this before and if so what were the details of the agreement (rent discount, terms, etc.) the rate for this unit would be $850 utilties paid before discount. TIA