All Forum Posts by: Mike Wood

@Christian Maddison  In your scenario, the developer is taking all the risk, with the land owner taking none.  From my perspective, the developer should just purchase the land for its value and remove the land owner from the equation.  In your scenario, the developer is putting up $1mil to build out, the land owner is putting up no cash.  The developer is making $190k on $1mil invested 20% cash on cash return, if everything goes right, the land owner is making $490 in equity on the three houses, plus getting paid $300k for the land, so $790k for ZERO money invested.  This deal is stupid for any developer to take.  Also, assuming your numbers are even remotely near reality, there valuations indicate its super highly desirable areas, and such the developer would likely look elsewhere for a development site.  Again, the developer is taking all the risk, providing alot of capital, and the land owner is doing practically nothing.

I'm hoping your the land owner in this scenario.  

@Matt Ternullo Are you talking about raw land development in to subdivision, or building houses on infill lots?   The later is likely much easier than the former.  I can not speak to land development, on to infill construction.  

For infill construction, start with asking around to local banks to see if they do construction loans for investment properties.  If they do, setup a meeting with them to discuss what you want to do and what they would require from you to do the funding.  Strong personal income will always help.  Its very unlikely that they will make a loan on a project with there being a GC or builder on the project. Simply too risky for them to loan to someone with not alot of experience that wants to self manage a new construction build.  Plan on needing a decent amount of capital to start the build.  Most banks will require 25% of total costs (land, soft costs, hard build costs, etc) as a down payment or equity position, and they will loan the remaining 75%.  Typical construction loans are interest only, 12 month loans, with interest paid on what is drawn on the loan.

@Danielle Du Plooy I just closed on a cash out refi, which was locked over a month ago (4/11/22), at 5.625% with 2.5 points, 70% LTV on an 2 unit investment duplex. Given how fast rates are moving, I would not be surprised at investment non-owner occupant loans above 7% at the moment.

@Archer Stone  In Florida, they buyers can either take your deposit as liquidated damages for you failing to complete the sale, or sue you to complete the purchase.  That is their only options with the Florida sales contract.  Having been a seller in FL where the buyer walked (the day of closing), I decided to keep the deposit, as they were not willing to purchase, so that was pointless to file suit.  I would request the seller accept your deposit as liquidated damages per the contract and have them agree to cancel the contract.  Once they accept to cancel the contract, you contact the escrow company and release the deposit to them and move on.

@Justin Lee I have found RW Krebs to be reasonable and very attentive to requests.  I have tried others, and had issues with them.

@Hina Pasha  I get the same result as Marshall did, its not going to cash flow with typical debt service.  Even removing management, vacancy and maintenance it still does not cash flow with debt service.  If you purchase it with cash (no debt), your cash on cash return (assuming 20% for PM, vacancy and maintenance) would only be around 4.75%.  That is not an investment I would be interested in. 

@Evan Polaski I agree with your vacancy comment, my units stay rented for a long time, and never vacant more than 4 weeks between tenants, and my typical tenants usually stay for 2-3 years. I think the issue is the agent/broker does not due commerical real estate, focusing on residential SFH sales, thus does not know how to list commercial units.

@Evan Polaski

  To answer your question, the current rents are based on current lease rates.  They have been renovating the units, so almost all units are on leases that are less than 12 months old.  I only have current rental rates per unit, not a full T-12 (which I would anticipate would look worse, given the amount of vacancy that would be required to do the interior renovations that they have done (updated flooring, full paint, updated countertops and appliance, updated bath including new tile work and fixtures (except tubs).  I have four (4) 2bed/1bath units within a few blocks of this property, so I have a decent idea where rents should be once the current leases end.

I have started to look at 5+ unit multifamily units, with all of my experience being in duplexes (14 units current). I would like some help on determining what expenses to include in the cap rate to figure out the real cap rate on deals (as most brokers are using garbage expenses). I fully understand that CAP rate is NOI/Purchase price or value.

Here is what I think the list of expense (all that are paid by the owner) should be for determining NOI;

1) Property Taxes

2) Insurance

3) Utilities (electricity, water/sewage, trash as applicable)

4) Landscaping & Pest Control

5) Repairs & Maintenance

6) Vacancy

7) Management Fee

When comparing with market cap rates, is there anything else that is included (like Capex)?

Now for info on an actual listing I am looking at.  

6plex, 4x1bed/1bath units and 2x2bed/1bath units.  List price $750k

Actual annual rents $61,800 (listed rents are close, maybe able to get them to $70,000 @ 0% vacancy)

Vacancy listed 9%

Listed annual expenses $11,240 (only includes current taxes, insurance, water/sewage, lawncare, electric and trash)

Listed cap rate 6%

The problem with the expenses are many, a) it uses current taxes, which will go up significantly once sold, b) its missing management costs as the owner self manages, c) its missing any repair/maintenance costs as the owner does the work himself, d) its missing any Capex costs, e) insurance is based on his cost basis which appears to be much less than 50% of list price, f) using the brokers expenses, it makes expenses only 20%, which is bogus.

I realize that this list price is way to high, please help me understand all the expenses I should be including in my CAP rate calc so that I can determine where the value should be.

@Manny Garcia  My costs did include the management of 10%. For me, the low rental rate and low valuation of the houses scares me the most.  I dont want my real estate investments to become a job, as such, I don't want low quality trouble tenants.  I personally actively try to develop units that avoid that.  That is not the say that you cant make money with those types of tenants.  If you put the properties with a property manager, you will avoid those headaches, but they you will have higher costs.

The purpose of the my post is to separate the cash costs from the total cost.  But, even with only cash costs your only bring in $775 per month net, which is $9300 a year.  One roof job and just broke even, that does even account for anything else like vacancy and other repairs.  Since you have 4 houses, there will always be something breaking.  I have 12 relatively new units, and 2021 was a bad year for AC units for me.  I had 4 repairs that needs to be done, each over $1k.

I think the margins are just too thin.  Add that to the low rents/low house values, and it would be a no brainer for me to pass on it.