Need Big Time Help From Big 30+ Multi-unit Owners
Have a very good deal (on paper so far) that came across my way. It is a 31 unit property that the landlord has owned for 20 years and just wants to retire. He admits he's lazy and really just wants to get done with it and go, but having no experience with these big units, I am looking for some serious help on this one.
I have partnered with a guy I know on this deal and we are going to work on it together. Basically I want to do all the duediligence necessary to ensure that this can be a good deal. We are pretty sure that the owner would take $250,000 when it's worth about $500,000+ easily. All the big money items are done and really from the eye you can only tell it needs some cosmetic work.
The people in the building have lived there for many, many years and the occupance at the moment is about 75% and the landlord attributes this to his laziness. He also has the property in his name...no LLC...no trust...no company, in his name.
So where do you start on something like this? What kind of inspections do you do...what needs to be done so after you purchase you don't find out a big surprise? The owner has stated several times that the gross rent is $60,000 a year.
Please private message me so I can started on learning and working on this deal. I at least want to give it my best shot and go through the motions.
Thanks,
Christian "The Solutions Kid" Beebe
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Get it under contract first. Then do an inspection of every unit. Look at the buildings on the outside, talk to tenants find out the scoop on the place. Sounds like a heck of a deal.
Well,
See that's the first problem. How do you get it under contract when you don't know exactly what price to offer? Coming back with inspections and other information will allow us to offer a certain price for the property, but until we have that it is hard to justify.
Christian "The Solutions Kid" Beebe
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Why not get the property under contract for a price you feel comfortable with. Make the offer subject to 45 days of due diligence, inspection, financing, and whatever else you want.
After the 45 days you either purchase the property for what you signed the contact for, or negotiate the property based on what you found out during due diligence.
Good luck!
Mike
I may have missed something, but gross rent of $60K/Yr with 31 units is $2K per unit, what are his expenses per unit and what cap are you using to reach a $500K appraisal? Have you shopped the market? What is a typical property in the market renting a per sft?
also appraisal, i'm sure the lender will want to see an appraisal done too, which being a commercial property in a heavily populated area may take 3 weeks+. Try and get estimates on what the repairs costs, make a few calls to some contractors and aim for the middle. use the estimated repair cost when you run financials and depending on what type of leases these 31 units are on, you should definetly considering raising the rent a little to put more revenue in your company
MT
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I wouldn't spend money on an appraisal until you have it under contract, order the appraisal after you know what you are willing to pay for the property, you can ballpark what the appraisal will come back at by doing some homework on your own, ie rent roll, market comps(these days pay big attention to soncessions in your market, rent rolls lie)
I agree the numbers look suspicious at first blush.
If you want to estimate an value, ask for a financial statement on the property - or ask to see his check nook stubs for the last year. Work out the NOI with reserve and V and C loss and divide that number by about 7%
One time the only way I could get the numbers on a sixteen unit complex was to enter the buyers check book entries into Quick Books Pro and run my own statement. ( He actually pulled out a portable checkbook out of his back pocket.)
The offer price you make can be based on numbers he gives you, but then when you do your audit you can change the offer to reflect the actual numbers. Never base things on a pro forma - go with actual.
Gregg
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I think a couple of you did your math wrong. 60K a year in profit for 31 units is:
60,000 / 31 = $2000 / 12 months = 75% occupancy = $261 rent per unit
Like I said, he is a very lazy landlord, had this property for 20 years and now just wants to retire. Am going to check through everything but don't think he has raised the rents for a while, it's in a lower income area but not a poor area. In addition, the neighborhood in the next two years is going to be huge retail and upscale living (have talked to several developers)
Christian "The Solutions Kid" Beebe
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my mistake, 60k/yr in Gross Rents is different than 60k/yr in profit. Anyway, I am here to learn REI for single-family. I have been underwriting and doing acquisitions for multifamily for 6years and would be happy to help if you need it.
Hey Kid,
What part of town are you talking about?
Tim
ask to see his tax returns pertainng to that property for the last 3-5 yrs
I'm not going to PM you, as It's best if the information on the forum is public.
Those rents (gross income) do seem really low, Even at 75% occupancy. Are you getting the whole story from the seller?
Here are a few thoughts (not in any particular order)
1. find out what the income of the property actually is. Ask the seller for a copy of his last years tax return (Schedule E). It will show you what he told the IRS his income, expenses, and debt service were.
2. Talk to a few tenants and find out what they're paying in rent. Compare this with his tax return. Find out what the market's vacancy rate is and comparable rent rates.
3. How much defered maintenance? How much money will you have to put into it up front to get it fully rented?
4. Get it under contract.
5. Get an inspector out there. Look for mold, lead based paint, environmental hazards, etc.
6. Verify that the property is a legal conforming 31 plex.
7. FIND A LENDER!!! One that does commercial deals and will lend on a small commercial deal. Most lenders consider under $500K small potatoes and don't want to do much with it. It may be a bit tricky. If you have a cash downpayment from a partner, a local bank may be a decent option (although most banks do 15-25 year amoratizations max). I'd start looking around immediatly. Be up front with them. Make sure they're ok with you bringing in a partner, etc. Most are, some aren't. Find a lender that works with your type of situation instead of trying to talk a lender into lending to you.
8. Cash flow analysis. Make sure you're going to be in the black. Don't buy it just because you can.
9. Figure out your asking price. Call some commercial realtors and find out what cap rate properties have been selling at in this type of area. (bad area = high caps, good area = lower caps). Get a feel for what the cap should be on this type of propety. If you are right that it's worth 500K and that he'll accept 250K, then the cap at 500K will probably be between 8.5 and 10. Obviously you want to get it for as little as possible. Make sure your offer is low enough so that you cash flow. After that it's just seeing how low you can get him. The rest is just extra gravy.
10. Pick up "the complete guide to buying and selling apartment buildings". Has some good info. Also pick up "landlording" and read it while the property is under contract.
11. Landlording: Is landlording for you??? If it isn't, do you have big enough margins to pay a property managment company? 31 units can tie you up. It is a big commitment with big expenses and a big mortgage. 31 unhappy tenants drive some people mad. Do you have the personaltiy for it. Not everyone does.
BTW, I've got a 24 unit complex.
Sounds like it could be a good deal for you.
If the GSI is $80K, expense factor of 40%, and price of $500K it gives you a cap of 9.6. Probably decent, unless the area and/or the property are totally run down.
Based on the assumptions above, and If the area is ok, I'd say that if you can get it for less than $400K (cap of 12%) you've got yourself a great deal.
If you think you can get it for $250K, then it's a no-brainer. If you don't want it, birdog it to me, I'll pay you and buy it myself.
Got some new information about all of this:
3 bldgs. (2-4 plexes & 1-23 unit)
Built 1901/1915 (Brick)
Rents: 8x$280, 16x$250, 3x$300, 4x$270
16-1 bed, 15-2 bed, (that's $96,720 potential annual gross).
Elderly tenants or working tenants, no children, very few pets, no Sec. 8.
HEAT: One new boiler for 23 units (owner pays heat & controls it), 8 units (2-4 plexes) pay own heat, one newer HW heater for all (with Recirculating pump), recently did $6-7k in steam line replacements.
ELECTRIC: Separate electric meters for all (2 or 4 FUSES each), 2-wire with some knob & tube.
WATER: All copper plumbing including soil stacks from about 6 ft. above ground up, each unit has water shut-off in unit and in basement.
GAS: Separate gas meters for each unit for gas stoves.
ROOF: Roofs are newer (flat).
Needs lots of painting in and out, kitchens and baths are linoleum, all other 2nd floor rooms are painted pine, 1st floor concrete. Tenants provide own carpet, stove & frig. Window A/C units, cable TV, private entrances front and rear on most units. Basement has coin laundry and LOTS of unused storage area (originally a ballroom and restaurant!). Known code violation in basement-plastered ceiling has been chopped into over the years. Single glazed DH wood windows, some screens, no storms. Some insulation added to floors and ceilings. Rear basement wall has horizontal cracking. He had Jacobs (Northside) rebuilt part of the block wall and do some drainage work along the back. It did NOT totally resolve the cracking, appears to me to be from hydraulic pressure near ground level. Exterior brick need some repointing in some areas, there are a few spots where the faces of the brick are scaling or deteriorating.
Okay, now what does everyone think?
Christian "The Solutions Kid" Beebe
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I agree get a profit and loss statment prepared by a cpa. The cpa for this reason he usually will get creative but wont outright lie about it. Repairs are a factor check it well hopefully it needs some check other properties in the area also. How old is it. In the city. Lots of factors here. Apartments are the best. If you can make it work its the best way to go.
If it's in the Cinci area, I may have some interest if you decide against it. My personal thoughts are, you need to get a contractor to look at that wall to get an estimate to jack it, repair it and repair the drainage problem (cause).
Any area of Cincinnati that gets $250 for 2 BR and $300 is going to need cosmetic repair. Son, I get more than that out of my hovels, I mean palaces up here in Coshocton. I would call the local police and ask about # of runs to that area in the last 12 months.
If it's not what you consider a war zone, then I would consider it.
As far as price.... my thoughts...
Let's look at the numbers.
At 100% occupancy at the current numbers... do not pay the seller for future value made by you, the total rents would be $8220.00 per month less 25% current vacancy or $6165 effective gross income. A quick method would be 5x's gross rent or $369,900.00.
Breaking it down, we need a little more information.
Expenses:
Heating- ?
Taxes-?
insurance?
Water?
Garbage/snow removal?
Advertising?
Supplies?
Maintenance?
lawn care?
pest control/inspections?
Management (on or off site)?
Accounting/legal?
Total expense?
You can figure it, but for the exercise we'll use 40% expenses or $8220 x 40% or $3288.00 Yes I used the expenses on 100% occupancy for 2 reasons. 1. Just because it is not 100% occupied does not mean the expenses will go down. 2. When figuring cashflow to buy a property, make sure that any errors will favor you.
$6165.00- $3288.00 = 2877.00 left over for debt service and monthly profit.
At $369,000 My max offer it breaks down like this, keeping in mind I know nothing of your own personal finances besides what you post about here... which might be um... exagerated to make yourself look better here... not saying it's bad, but it does happen
80% of $369,000 is $73,800.00 plus closing costs. You may need to get creative to do this portion. Anyhow,
Mortgage on $295,200.00
7.5% at 20 years = 2378.11
7.5% @ 15 years= 2736.54
You said the seller would probably take $250,000.00 If this is true I would probably offer $300k w/ 60k, or 20% being credited back to buyer for deferred maintenance. That would leve you with closing costs as your total out of pocket expense to own the property.
Mortgage on 240k = 20 @ 1933.42 or 15 @ 2224.83
If the seller wont go for it, ask for a 60k owner carried 2nd amortized over 30 years with a 5 year balloon, which gives seller monthly cashflow of 419.53 plus $240,000.00 in cash less capital gains and closing costs.
$2224.83 plus 419.53 = 2644.36 debt service (20 year) - 2877.00 (effective income) = $232.64 net positive cashflow.
Looks terrible for you but the upside is if you can get it to 90% occupancy, or if you can afford the cash out of pocket, you pick up an extra $1233.00 per month, still thin. Raise everyones ren $25.00 and you raise an additional $700.00 per month.
Good Luck,
Shawn(OH)
I agree with Hibby! If you can take this for less than 300K, there is not much more to discuss given all you know is accurate? If the area will improve over time, then remodel each apartment as they become available and rent for FMV then.
I wish I could find something similar in the NYC tri-state area. A project like this would keep me busy for awhile and out of trouble!
Good luck and the next post I want to see is that you are in contract!!!!!
Well, here's the update...
Sat down and really figured out that one this guy does like taxes at all and pockets most of his rent in his hand...
Second, his is very motivated and is NOT cash strapped at all.
So, with this all in mind, my partner and I cam up with this scenario to propose, tell me what you think:
We are pretty sure the guy will take the offer of $250,000 we are proposing. The only glitch is the lending portion because of the scenario. Private Investors would love this, but not sure if lenders would go for this.
He would LOVE to have his payments broken up into 3's. Meaning, one year $83K, next year $83K, 3rd year $83K for tax purposes. If we can do this, obviously this not only helps our negotiating position but cash flow from the start, plus if we do end using a private investor, it would make the investment easier (in my mind)
Since there are two plots, one with both 4 plexes and the other with the 23 unit, we want to put the properties under land contract. Then take out a small rehab loan for the two 4 plexes, fix them up quickly, raise rents, and then at the end of the year or sooner, refi the plexes, take out cash, pay him first year payment, then use extra refi cash to fix up big building. Fix big building up, raise rents, end of year refi that building or both properties, take cash out, cash him out second payment, etc.
After this point, we would have the buildings fixed up, rents raised, people happy, great cash flow and would have increased the buildings value more than $400,000 easily.
Okay, so that's our thoughts...so looking for advice, different way to struture it, etc. We do not want to put any of our cash out up front at all so that is not an option.
Look forward to hearing from all of you,
Christian "The Solutions Kid" Beebe
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My question a bit off topic but how did you find this deal? advertising, realtor what?
Sire
Realtor let us know about it, that this guy was interested.
Christian
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