All Forum Posts by: Sam Amir

Hey Evan, the most effective way to analyze a property is by taking a look at its NOI, or net operating income. We can use that to determine the market valuation. It's a simple equation based on gross income, expenses and the cap rate of the area. Notice that I did not include any debt (mortgage) you have on the property. Income is based on rents and other income sources like laundry or garages. Typical expenses of a property are: taxes, utilities, maintenance expenses, capital expenditures (big ticket items like roof, boiler replacement, etc.) and insurance. The cap rate, or capitalization rate, is basically the rate of return on an investment property. This is determined by local market forces, so just ask your realtor to give you typical cap rates of a certain zip code. The realtor will look through listings on the MLS and determine a cap rate based on buildings that have sold around you. Be wary though because cap rates can be exaggerated.

Also, you always buy the property on it's current condition. Meaning the income it's producing right NOW, not tomorrow or 5 years from now. 

Now that you have everything you need, valuation for a MF would working something like this:

Gross Income (from rents, laundry, garages, etc.): $50k/yr

Expenses: $25k/yr

Cap Rate: 8%

Net Operating Income (NOI):  Gross Income - Expenses

Market Valuation: (Gross Income - Expenses) / Cap Rate = $50k - $25k/.08 = $312.5k

So that's what you would BUY the property for. For a general rule of thumb, this works pretty well. The selling price should be close to this number.

Your question seems to indicate you're trying to rehab or add value. You can determine the new valuation (ARV) by adjusting the income and expense part of the equation. You've either raised rents by rehabbing the property or putting rents to market rent, or, you've cut down expenses somehow.

Never buy the property on the ARV price. Some owners will bump up the price of a building if they know value can be added, but this shouldn't be much.

Hope that helps, good luck!

Hi,

My name is Sam and along with my 2 partners, we have a solid 6 unit building with an A+ location, on the edges of Pilsen in Chicago (very hot market), under contract. We're looking for an accredited investor with ~$125k to invest as a partner. We will be acting as the property managers and will take care of all the headaches that come from property management and you, as a 100% passive investor, will sit back and collect a check every quarter from the cash flow. But, there's more to this deal than just that. Read below:

Property Description

-Corner building, 6 units consisting of (2) 3 BDR's and (4) 2 BDR's

-Rents are WAY under market

-The building needs some TLC, but nothing major

-Few blocks from main street with grocery and shopping

-Few blocks from the 'L' and Metra stations

-Next to Pilsen, where property values have skyrocketed within the last few years

-On a boulevard similar to Logan Square and Humboldt Blvd. (has about 50' of green area in front of building)

With your investment of ~$125k, we will implement the BRRR method and rehab each unit, raise the rent to market rent and refinance within 9-12 months. Once refi'd we will be able to pay you back your initial investment, and an additional 8% return on your investment on top of that. You will also have 50% equity of the building.

Here's a quick overview of the numbers:

Purchase Info

Purchase Price: $370k

Rehab LOC from HML: $60k @ 13% interest (will withdraw as needed)

Total Project Cost: $430k

Hard Money Loan: $284k @ 13% interest (80% of total project cost)

Investment Needed

Down Payment: $86k (20% of total project cost)

Closing Costs: ~$15k

Cash Reserves: ~$25k (Need to account for negative cashflow while rehabbing)

Total Investment Needed: ~$125k

Valuation (ARV)

Debt Service: N/A since with the refi we will be able to pay off the HML + interest

Gross Income After Rehab: $76.8k/yr

Total Expenses: $24k/yr

NOI: $52.8k/yr

Cap Rate of Area: 8%

Valuation (ARV): $660k

Payout After Refi

$660k - $284k (hard money loan) - $32k (interest on hard money loan) = $344k

$344k - $60k (line of credit) - $4.6k (interest on line of credit) = $279.4k

$279.4k - $125k (investor money) = $154.4k

$154.4k - $10k (preferred rate of return at 8% annually on $125k) = $144.4k

Surplus = $144.4k (would refi just enough to balance this out)

Returns (ARV)

Income: $76.8k

Expenes: $24k

NOI: $53k

Mortgage: $33k

Cash Flow: $20k

Investors Return: $10k (50% equity_

ROI and C-C Return would be a little skewed since you would get your initial investment back, therefore a 100% return. Essentially, the $10k/yr you make is with no money in the deal since you've been refi'd out.

If this is something you would be interested in, please message me and let's discuss details. I have a pro-forma, presentation and all legal documents ready to go. Let's talk numbers!

I appreciate your time and consideration.

Thanks,

Sam

Hi,

My name is Sam and along with my 2 partners, we have a solid 6 unit building with an A+ location, on the edges of Pilsen in Chicago (very hot market), under contract. We're looking for an accredited investor with ~$125k to invest as a partner. We will be acting as the property managers and will take care of all the headaches that come from property management and you, as a 100% passive investor, will sit back and collect a check every quarter from the cash flow. But, there's more to this deal than just that. Read below:

Property Description

-Corner building, 6 units consisting of (2) 3 BDR's and (4) 2 BDR's

-Rents are WAY under market

-The building needs some TLC, but nothing major

-Few blocks from main street with grocery and shopping

-Few blocks from the 'L' and Metra stations

-Next to Pilsen, where property values have skyrocketed within the last few years

-On a boulevard similar to Logan Square and Humboldt Blvd. (has about 50' of green area in front of building)

With your investment of ~$125k, we will implement the BRRR method and rehab each unit, raise the rent to market rent and refinance within 9-12 months. Once refi'd we will be able to pay you back your initial investment, and an additional 8% return on your investment on top of that. You will also have 50% equity of the building.

Here's a quick overview of the numbers:

Purchase Info

Purchase Price: $370k

Rehab LOC from HML: $60k @ 13% interest (will withdraw as needed)

Total Project Cost: $430k

Hard Money Loan: $284k @ 13% interest (80% of total project cost)

Investment Needed

Down Payment: $86k (20% of total project cost)

Closing Costs: ~$15k

Cash Reserves: ~$25k (Need to account for negative cashflow while rehabbing)

Total Investment Needed: ~$125k

Valuation (ARV)

Debt Service: N/A since with the refi we will be able to pay off the HML + interest

Gross Income After Rehab: $76.8k/yr

Total Expenses: $24k/yr

NOI: $52.8k/yr

Cap Rate of Area: 8%

Valuation (ARV): $660k

Payout After Refi

$660k - $284k (hard money loan) - $32k (interest on hard money loan) = $344k

$344k - $60k (line of credit) - $4.6k (interest on line of credit) = $279.4k

$279.4k - $125k (investor money) = $154.4k

$154.4k - $10k (preferred rate of return at 8% annually on $125k) = $144.4k

Surplus = $144.4k (would refi just enough to balance this out)

If this is something you would be interested in, please message me and let's discuss details. I have a pro-forma, presentation and all legal documents ready to go. Let's talk numbers!

I appreciate your time and consideration.

Thanks,

Sam

Pretty much @Michael Le is right. I'd even go as far to say their utility expenses are probably fudged as well. You probably know how to do you due diligence properly, but double check by calling utility companies in the area, asking for bills from the last 2 years, etc. You'll run into this a ton with MF, so be wary of any numbers sellers and brokers give you. 90% of the time, they're exaggerated, ESPECIALLY the cap rates. Good luck!

Hey man, I 100% agree with your assessment here. i.e. paying your mortgage off and taking out a HELOC to go to your next property. This will SUBSTANTIALLY lessen your burden. One thing I keep realizing is how huge leverage is. Use it wisely and you will profit.

On top of that, you'd be locking in an interest rate on the HELOC near the same as your mortgage...SUPER LOW (I just got a 4.25% rate on a HELOC for a 6 unit). Interest rates aren't going to go down for a while it seems, only up. Let me add in a few more pro's in taking out a HELOC to help you make a decision quicker:

-If you don't take out a HELOC now and want to later, you're going to regret it when the interest rates are high

-Having a large LOC available to you and being ready to jump on a great deal immediately

-You can buy your next property without a mortgage, although you will pay interest (but it's simple interest, not compounding) on however much you took out of the LOC

-If the numbers work on your next deal you can double down the cashflow, pay off the HELOC completely, and then take out an even BIGGER LOC for a BIGGER property = Exponential Growth.

Now, mind you, my risk tolerance is way higher than most people cause I'm partly crazy, but also, relatively young so it really depends on your goals (super cliche, I know haha). If you think the economy is going to crash or correct itself and you won't be able to cover high vacancy (I believe the vacancy rate during the recession was 15% in some places), then don't do this. BUT if you're optimistic, then this is definitely something to think about.

Good luck!

Hi,

My name is Sam and along with my 2 partners, we have a 6 unit solid building with A+ location, on the edges of Pilsen in Chicago (very hot market), under contract. We're looking for an accredited investor with ~$125k to invest wisely as a partner. We will be acting as the property managers and will take care of all the headaches that come from property management and you, as a 100% passive investor, will sit back and collect a check every quarter from the cashflow. But, there's more to this deal than just that. Read below:

Property Description

-Corner building, 6 units consisting of (2) 3 BDR's and (4) 2 BDR's

-Rents are WAY under market

-The building needs some TLC, but nothing major 

-Few blocks from main street with grocery and shopping

-Few blocks from the 'L' and Metra stations

-Next to Pilsen, where property values have skyrocketed within the last few years

-On a boulevard similar to Logan Square and Humboldt Blvd. (has about 50' of green area in front of building)

With your investment of ~$125k, we will rehab each unit, BRRR style,, raise the rent to market rent and refinance within 9-12 months. Once refi'd we will be able to pay you back your initial investment, plus an additional 8% return on your investment on top of that. You will also have 50% equity of the building. Here's a quick overview of the numbers:

Purchase Info

Purchase Price: $370k

Rehab LOC from HML: $60k @ 13% interest (will withdraw as needed)

Total Project Cost: $430k

Hard Money Loan: $284k @ 13% interest (80% of total project cost)

Investment Needed

Down payment:  $86k (20% of total project cost)

Closing Costs: ~$15k

Cash Reserves: ~$25k (Need to account for negative cashflow while rehabbing)

Total Investment Needed: ~$125k

If this is something you would be interested in, please message me and let's discuss details. I have a pro-forma, presentation and all legal documents ready to go. Let's talk numbers!

I appreciate your time and consideration.

Thanks,

Sam

Hey @Claudia Saltijeral, congrats on getting into the MF space :). Don't be scared of "big numbers". If you boil it down to the basics, it's no different than a 2 unit, right? 10% isn't too crazy, maybe depending on the neighborhood it's in. As you know, low caps are indicative of a fairly stable local market and 'turnkey' properties, usually located in A neighborhoods. 10's are for properties that need some work and are usually in B to C- neighborhoods. You can begin to assess if this deal makes sense based off this. 

@Account Closed's is absolutely right, make your own pro-forma. 100% know your numbers on this. Adding on to his insight, here's what I would ask myself or be aware of:

-How much work does each unit need?

-If work is needed, how do I get tenants out to do the work? What's my timeline on rehabbing, marketing and filling the unit?

-You said you are going in with another investor. Will you be forming a LLC? LLP? Figure out what works best for both parties. Don't know what your relationship is with the investor, but be sure you're covered in your partnership legally. Spend a little extra dough on a good lawyer to cover yourself.

-Are units sub metered? 

-Who are my tenants? (demographics, age, jobs)

-Are rents under market? If so, can they be bumped up to market rents with work put in?

-How much work needs to be put in (dollar value) to bump up the market rent? (be careful to not overdo it ie don't sell a high quality product in a market where people won't pay for it)

-What is the vacancy in the area?

-What's around the building? Shopping, food, nightlife, parks, etc.

-Are leases written? Get copies.

-Meet the tenants before closing. Introduce yourself as the property manager or a company, not as an owner.

-Get copies of utilitiy bills paid for the last 2 years

-Obtain P&L statements from owner

-How much property tax was paid last year, and can it be lowered?

-Is there potential to get income other than rent? (laundry, parking, etc.)

-Who will be managing this property?

-Plan out systems for collecting rent, communication with tenants and repair requests

-Do a thorough inspection and be keen on foundation issues (floor curvature and beams in basement), boiler/furnace unit, wiring, flooring and make sure to check the roof. Your main capex's will be the heating unit and roof. Hopefully never foundation issues.

There's more but I had to stop before I scare you off haha ;). Just be sure you get accurate information from the owner. To be honest, you probably won't, so add in some buffer in your numbers, looks like you've analyzed properties before so most of this you probably already know. 

Good luck!

@Account Closed

Hi,

I'm looking for some financing on a 6 unit multifamily we own free and clear here in Chicago. The building is worth about $650k and we need a line upto $350k. I've been told that a bank will only loan a HELOC up to a max of $250k so I should take the HELOC at $250k and refinance for the rest, but I'm looking for some sort of financing vehicle that will allow me to have a line we can withdraw only as needed. If anyone can help with this or point me in the right direction it would be greatly appreciated.

Thanks,

Sam

The biggest nightmare I can imagine is a situation in where you've taken a HML at a high interest rate under the assumption that based on your ARV, you'll be able to pay the HML off + the interest payments.

Now what happens if you were wrong about your estimated ARV and can't pay off the HML? Well, you have two mortgage payments to make...one from the conventional bank and one from the HML at the obscenely high interest rates. And unless you literally found a building for a dirt cheap price in a high rent area to cover BOTH loans with the cash flow or have spare cash reserves...well you're screwed.

*knocks on all the wood furniture in apt.*

Hey Tim, as Darren said, it depends on what your goals are. Are you willing to do another project? You know how much work it takes now based off the first, are you still thinking it's worth it? Personally, I would say refinance and look for another opportunity. Interest rates are only going to go up now (not by much...but still). Lock in the lowest interest rate you can and scale up. Good luck!