All Forum Posts by: Justin Knapp

I don't see anything wrong for investing for cash flow, especially if your focus is investor dividends. Two positive aspects of cash flow - you can use it as proof of stability as you're trying to increase investor confidence, and you can use it to give you a base to increase future activity. Relying on appreciation is just speculation to a degree (unless you're factoring in cash flow improvement due to property upgrading and improved management, which I wouldn't consider appreciation; that's a skilled turnaround). Cash flow opens up so many opportunities as it gives you the ability to take a longer range view of your operations/direction.

A solid value / price is tough to gauge @Anthony Gayden without any of the other answers because creating that number is a function of what the market can bear (rents), what you will need to put into it to get a solid tenant, and what you can convince the lender to assume. Overall, lower quality unit = lower quality tenant = higher risk and higher bad debt (and higher legal costs) = lower NOI = reduced value. That's a simple way to look at it but not knowing the full totals that will go into the property limits how much we can refine a final value. You're definitely on the right path, and if you have the stomach for what others seem to think is going to be a challenge due to the area and potential tenant base and are willing to deal with the headaches, then keep digging into the numbers. The owner might not see it your way now, but if no one else bites within the next month or so you can always revisit and offer better terms if he's willing to take back a 7 year second it could pay off. I went through something similar in Augusta GA and can say I wouldn't rush into it again - a lot of vandalism during construction and ample scrutiny from the city since it was a section 8 property and the previous owner ran it down to near condemnation. I had to spend a lot of time down there monitoring things and even some nights on the site with concerned residents so we could try to catch the vandal. It's a lot of work if you want to do well for the tenants but can pay well if you are transparent with both the city and potential/current tenants.

@Mike T. has got it right with his numbers, I came up with the same 10.1% coc return given the supplied totals. A few other questions to consider, in addition to the solid ones above:

• What's current occupancy? Assuming it's not 100%, did you consider upfront leasing costs as well as ongoing leasing/marketing totals?
• What's market occupancy?
• What are market rent for similar 2/1 units?
• Are there any repairs needed, appliances requiring replacement, etc.?
• The lender might require you to set aside a monthly replacement reserve which isn't factored in your totals

Typically, expenses are grouped to sub totals with individual line items. For example, sub totals I've used are:

• Rental Income (GPR, Vacancy, Concessions, etc.)
• Other Income (Late fees, app fees, vending, etc.)
• Bad Debt (write-off, collected, etc.)

Total Income (Sum of above sub totals)

• Renting Expense
• Admin Costs
• Salaries/Benefits
• Contract Repairs
• Maintenance/Repair Supplies
• Management Fees
• Utilities
• Taxes
• Insurance
• Property Improvements

Total Operating Expenses

NOI

• Property Improvements
• Interest Expense
• Partnership & Other Expenses

Net Income

Each of these sub totals will have their own individual accounts which feed them. The level of detail/number of accounts which you add is mostly dependent on the the size of the project and the level of detail which your accounting system utilizes.

-Justin

Hi Mike,

@Karen Margrave is right on in regards to the building structure.  Also ask for records/receipts of any work that was done, appliances replaced, etc. On the management side, dig through all of the tenant records and leases. You want to make sure to know the terms of the current leases, if they're paying market rates, how long the tenants have been in place, their payment history, etc. You should be able to tell pretty quickly if the value of the leases is there to justify the price.

What kind of homes/apartments/MH experience do you have? That's an amount of money which can do a lot if deployed properly. Once we know what you're comfortable with doing, then talking about how to use it would make more sense.

Assuming you reach out to current residents as soon as you close, or even better convince the current owner to send a change of management form to the tenants which you prepare, ahead of time, then the specific day you close shouldn't be much of an issue. There are always going to be some tenants who will try to push the envelope with the new owners/mangers to see what they can get away with, but if you put your rules in place from day one and take a hard line with offenders you should be good.

Having multiple offers is a must, especially since lenders have been known to change their minds last minute. The buyer won't care if you get stuck in a bad situation due to a lender walking away and you'll want to ensure you don't lose a good property (or your deposit if it's non-refundable). Even after using the current lender with whom you're working, having communication with the other lenders is good because you can go back to them in a few months to show that you did in fact close on the property and are a serious buyer for the next round.

Hi Tyler,

Definitely a lot of info to work with, which is great. I'll start with a few off the top of my head questions split between rehab and ongoing operations.

Rehab:

-Assuming the roof costs come in at $10K, I've got a minimum of $107,200 in costs given your totals. That doesn't include any AC work on the second building (which I assume was excluded as it's not needed. But I'd question that given the overall state of the building you give.)

-Will the tenants continue to live in their current units as work is done, or will they need to be displaced? Their income needs to be factored into this if they stay, and if they need to be moved, depending on their lease, you might need to cover some/all of the costs. There's obviously the potential of moving them into a post rehab unit but will you be able to get the increased rents and as they're tenants prior to you buying will they treat the new unit as well as a new rehab required?

-If the property is in such rough condition, will $2K in landscaping costs and no exterior work be enough to get new tenants at the increased rental rates? All the interior work is great, and probably way overdue, but if someone won't walk into a unit to see it it's poorly deployed capital.

Operations:

-What's current market occupancy and how long do you think it will take to get the units rented? You show how much they can rent for, but knowing how long it will take to rent them, and if you want to keep current residents (assuming they'll pay the new rents), will be necessary to model.

-There's no marketing budget and if you're trying to turn around the image you're going to need to do something which will draw the type of attention you need. You'll need an ongoing cost considered as well as a bigger upfront splash to get people in the door.

-I might have misunderstood something, but I calculated $46,200 gross potential based on rental rates of $425 (1 BR) and $500 (2 BR). Was I missing something here?

There are many more questions to be asked, and I'd be happy to go review some of it with you if you'd like, but this is a good starting point.

-Justin

Stepping back to really figure out what type/condition of property you're willing to take on is a great place to start. If you're handy, which I'm not particularly, and are willing to do some work yourself then you'd probably be more inclined to purchase a property with physical issues. There's usually more upside here is the seller is willing to acknowledge the property's disrepair. If you're new and trying to get acclimated, I would focus more on buying steady cash-flow. You won't be taking on as many potential issues and will be buying a proven business, assuming your due diligence shows no major issues.