All Forum Posts by: Account Closed

James,

I plugged in a few numbers, mostly from the broker pro-forma numbers. 

They came out to a 53% expense ratio, give or take, which is about right. Maybe a little on the high side...we usually underwrite at a 50% expense ratio.

Given that, the deal is still almost an 8% cap rate. I don't know where this building is located, but an 8% cap rate in our market is very good.

Everyone is going to manage a property different so you have to determine what works best for you...but I'd argue the pro-formas aren't that far off.

@Chris Penny Run away from this broker as fast as you can. Any broker who charges someone for showing them deals is not of good character.

@Chris Penny Feel free to email/message any questions you may have. If they aren't conveying that type of information, they're being lazy AND dishonest, in my opinion. I'd ask where the numbers came from, whether they are pro-forma from the broker or actual numbers from the seller.

We use a mix of both in our marketing packages. We report actual expenses except management fees and misc. & reserve costs...usually because those costs can vary so much.

All of these numbers are confirmed during Due Diligence, usually. It's always in the best interest of the broker (in my opinion) to report the actual numbers as well, because any diligent purchaser is going to want to see the actual expenses the current owner has incurred on the property.

@Chris Penny I understand you not wanting to get advice from the broker who is listing the property, but broker's are really just conveyors of information as opposed to salespeople. Either a deal is going to meet your returns/risk threshhold or it isn't....our job is to provide information, recommendations, and suggestions as it relates to a given deal.

What we do at our firm is we often have loyal clients who will consult us about deals that we aren't even involved in. We've built relationships and are happy to give them thoughts and information regarding the deals they're working on. The reason most CCIMs are brokers is because it's really just a part of the job description. We are real estate consultants.

Hopefully this is of some help...there are of course plenty of brokers who are looking out for only their interests, but I'd argue that the most successful brokers are those who genuinely care about providing value to their clients regardless of their personal gains.

Claudia,

Welcome to the forums! And congratulations on your first step into commercial multifamily property.

The first step we take when underwriting a building is to get an up-to-date rent roll as well as the current operating statement, showing income and expenses. We then break down the expenses into categories. Some of which we use the ACTUAL numbers provided by the seller (such as their current utilities costs, taxes, and insurance). Other items we tend to pro-forma, as we do enough of these properties to know how they should be running (assuming they're being managed correctly). For example, we usually underwrite $400 per unit per year in Misc. and Reserve costs. 

Again these are all generally rules of thumb. Every deal is different. Once we put together financials, we then work backwards using Cap Rates, Price Per Unit, and GRM to find an ideal price.

A 10% cap rate on a 24 unit building seems very good...what suburb is this in? We tend to see these buildings trade at cap rates between 6.5 and 9, generally.

 Hope all of this is a step in the right direction.

@Jered Sturm what are the cost associated with submetering a building in Cincinnati? Would it be worthwhile to submeter a building as small as an 8 unit with a (8) 1Bd/1Ba unit mix?

@Kent Schmuland I'd reach out to Adam Curry...

https://www.biggerpockets.com/users/AdamC29

I've worked with him in the past and he does great work as a broker.

Paul,

If for nothing else, I'd pursue it for educations sake. We could sit here all day and analyze the deal...jump in and start working it. If you do put the building under contract, you could then do some better analysis by requesting ACTUAL expense receipts and records. 

Let us know what you wind up doing and if you need help along the way.

When dealing with these smaller buildings, that's more of what the Misc. & Reserves category is for. You figure some years you'll have those big CapEx projects, others you won't. I just threw a quick underwriting together at $300/unit. If you feel that $500/unit/year is more appropriate, then by all means factor that in...with the analysis I posted above, this would bring your cap rate to 7% roughly.

I'm not surprised to hear that the Section 8 tenants are garnering those kinds of rents. You can cashflow very well with Section 8, but your repairs after the tenants vacate the property are usually much, much higher. Plus you have to deal with the inspections that can warrant necessary repairs and upgrades because, let's face it, Section 8 is a goat rodeo

@Paul Lachaud I ran a quick cash flow analysis for you at the current rents, the expenses you detailed with a few alterations.

Initial thoughts are that you'd do yourself well to self manage. Water & Sewer seems very low...is this the current amount being paid by the owners? Insurance also seems low. My father owns many properties in Cincinnati and insurance is usually 4% of SGI, which in this example would be closer to $800/year. Laundry also seemed high, so I lowered it to $3/tenant/week.

Let me know if you have questions. If you could in fact raise rents to $500/mo, your Cap Rate jumps to 11%.