All Forum Posts by: Lester Schmitt

I have been analyzing a 10 unit apartment building. I found it through a traditional broker not a comercial broker. Seller is providing scanty records such as no Rent Roll or detailed expenses. 

I have submitted an offer and would like to get your opinions on this purchase rehab. My intention is to buy, hold,rehab, refinance and purchase another property. I needed to make an offer just to overcome inertia. If my offer is not accepted, I want to learn from the process. Or be ready to negotiate further.

The property is located in an area where the town has their own municipal electric and the rates are low. So the apartments are all electric and tenants pay their own utiities except water/sewer, which the landlord pays (although the rates for water are also low). Tenants also pay their own trash bills individually.

In lieu of rent roll,  he sent his schedule E for the past year. Seller listed that 8 units rent for $500/month and two rent for$450/month. So rents could be $58,800 at full rent. His Schedule E states $37,600 for income.

Proforma expenses include a 10% management fee and 8% reserves for repair.

Gross income = $37,600

Expenses- $24,300

NOI= $13,300

I am willing to buy at a 10 Cap so I should have offered $133,000.

Owner has property listed at $299,000

My private money guy will finance 70% of the purchase price.

I would want to get this with as little of my own money as possible, so I am asking the seller to finance 25% as a second mtg.

Here is where I lost my nerve. I offered $175,000 with the 75%/25% financing so I am offering to overpay for current NOI and would have negative cash flow of $5000 the first year by the proforma.

The potential in this property comes from correcting the current mismanagement.

The 10 units are 2BR 1Bath apartments that would rent for $700-750 per month if rehabbed. I would get real CAPEX numbers as part of due diligence, but of the units I have visited, my estimate of $5,000 per unit would get the rents to the proper level.

At Rents of $700 per unit and vacancy of 10%, the NOI becomes $45,000

So, would I have been better to stick with the offer that the property analysis led me to $133,300.

Was I ill advised to offer $175,000 which is closer to what the seller is asking.

Is there another way that you would have structured this offer, or another strategy you would have used?

Thanks for your comments.

I have not posted in years, but have lurked and learned so much from Bigger Pockets. I bought two properties with no money down, but found I concentrated on improving those properties such that I could refinance and pay off the ballon on the second mortgages before I looked for more properties.

Now as I review my next potential purchases, I am looking at a 10 unit that seems mismanaged. I am looking at it as a buy and hold.

If I find a nice deal, but it is more than I can handle, I also see that I might be able to wholesale it. My question is- how do I or the wholesale buyer determine the fee I would get. Is it a percentage of the sale amount? Just something you negotiate? Is there a formula?

I appreciate he feedback. I had purchased the property anticipating that it would convert to a nice 3 or 4 unit. It will be fine as a duplex, but I did the first side over to get a unit rented and then was going to split the second side. Had I educated myself better, I would have done both sides simultaneously and been done sooner.
Also, if I understand correctly, if I buy an existing 3 or 4 unit and if I make substantial renovations, I could be needing to add a sprinkler and alarm system. That would discourage someone from improving the 3 and 4 unit housing stock in a community. Am I understanding this correctly? What level of improvements would trigger this?

Well nobody seemed interested in this topic. The estimate I received to meet the code requirements of installing a sprinkler system and alarm system was $10,000-12,000 dollars. I am proceeding with a two unit renovation instead of a three unit.

Lester Schmitt

I purchased a 2 unit building in upstate NY in a small village where the Hospital is the major employer. My target tenants are traveling nurses and doctors who the hospital employs for 3-12 months periods of time. I have finished and rented one unit for $1500 per month, which covers my expenses. The finished unit is a two bedroom 1 and 1/2 bath two story unit.
The side I am getting ready to renovate could be easily split into a one bedroom apartment upstairs and a one bedroom apartment downstairs. These would rent for $1000 apiece. Utilities for all apartments would be separate.
I asked the local codes enforcement what would change if I did make this into a three unit and he warned me that I would be required to have a sprinkler system in all units and an alarm system.
I could incorprate these changes into the side to be renovated, but retrofitting them into the already completed side would be more difficult.

I am looking to hear anyone's experience as to what the cost of a sprinkler sytem/ alarm system might be and if there are other incremental costs or regulations that should be anticipated that I haven't thought of.

For the extra $500 per month income and some decrease in insurance costs, I am motivated to do this, but the regulatory hassels are less as a two unit.

What do you think?

I did not close on this deal.
The income was confirmed and the cash flow indeed looked like it would be $40,000 annually. I knew the building needed upgrading and was willing to put up to $30,000 a year of the cash flow back into the building for 3 years to bring it up to code and increase market rents.
I had a structural engineer look at the place and he showed me that in the first 3 years I would need to put twice that into the building. In addition, the landlord pays the utilities on this building and although splitting the utilities was part of the project, the risk of negative cash flow was something I could not risk.

Thank you for that reply Scott,

Based on your experience, I have started bugging the lender to fix this.

I have decided that I will contact the credit bureaus and request they remove that mistaken identity entry.

I applied for some business credit. When the lender pulled my credit report, it appears that someone typed in my social security number and transposed two numbers. The credit report shows that Experian and TransUnion matched that SSN with a deceased person and the report shows an ID Alert and High risk warning

The report then does a match by name, date of birth and address and those match so I get a good credit report and have had some business credit cards approved.

Do I need to contact the Credit reporting company to correct their error? Will the risk alerts now show up on another credit report where the SSN is entered correctly

Lester Schmitt

Steve,
What can you tell me about low income government grants. Have you had any success obtaining any. I have searched BP and found only sketchy information about government grants for multi familie properties.. Could you educate us in this area?

Lester