Posted by Mark (SDCA) on April 06, 2000 at 14:51:47:
It looks to me like the expenses he is quoting you are low. (This is VERY common.) I would use that to negotiate a lower price. But frankly, if you have to get new financing, I would pass on this one. The key to these small apartment buildings is assumable loan + seller carry. Commercial financing is simply not attractive.
Mark
Multifamily Analysis Help Needed - Posted by dave
Posted by dave on April 06, 2000 at 13:02:59:
I am a newbie to Rental Property and am wondering if I can turn this into a ‘do-able’ deal. I know that it is not there today… looking for ideas on a counter… 8 unit; average condition for neighborhood; average to above average need for light maintenance; On to the financials:
Gross Rents = 53,000
Expenses:
elect, gas, water, garbage, tax & ins = 11,000
I added 3% for mgmt & 250 per unit maint = 3,600
NOI = $38,400
Institutional Lender 75% LTV; 9.375%int; 20yr
Debt service = 28,800 yr.
Seller carry 25% LTV; 8%int; 20yr amort; 5yr ballon
Debt service = 9,200 yr.
Cashflow $1,000 yr.
So far this is sounding bad but here’s my dilema; the cap rate is 11.5 (good cap in my opinion) and naturally the seller feels the rents can be increased 10%…good neighborhood, etc.?
Does anyone have any ideas on ways that I could counter? He wants to 1031 it. The most obvious is price… but I have to think outside of the box on this one… It has to cashflow and I don’t want to put my money on the line…
Any ideas would be appreciated…
thanks in advance.
dave.
Re: Multifamily Analysis Help Needed - Posted by Jim Rayner
Posted by Jim Rayner on April 06, 2000 at 19:37:20:
To borrow a line from a friend of mine you need to begin with the end in mind, as was pointed out by John Butler. You must also realize that what you are actually buying is an income stream not a building and not the upside potential. What is important is that you establish your criteria for the acquisition of the income stream in question, this will determine the amount and terms of your offer. Each of us who looks at this deal will all arrive at a different conclusion based on our experiences. None of us has the specific knowledge of the market in which this deal is located to be very specific as to what you might do to make this a deal. Based on the Asking Price it would appear that the seller is not the least bit motivated in my opinion.
With this in mind here is my assessment:
Assumptions are: Vacancy rate, 10% expenses 40%, conventional commercial financing, and a sound demographic analysis
NOI = 28620 Value of the income stream : 286200
To meet my criteria the maximum recommended Offer is 178875 however from this I would deduct any deferred maintenance costs. Your comment regarding average to above average need for light maintenance would lead me to believe that there should be some reduction in the maximum offer for deferred maintenance.
I get several packages a month for deals like this and they typically get a quick review and placed in one of 2 places, the round file or the hold for motivation box until it surfaces again. Don?t allow yourself to become a motivated buyer.
I just did a deal like this. - Posted by Andrew Smith (Phila)
Posted by Andrew Smith (Phila) on April 06, 2000 at 19:08:41:
Your expenses are too low. By a long shot. I just purchased 34 units with a commercial loan and a seller second for 25%. Also, the seller gave me a credit of $20,000. which covered my closing costs. I factored in a 10% vacancy factor and a 10% management fee (which I pay to myself). My tenants pay their own heat and my expenses still total 42% of the adjusted gross income (we have high property taxes here in PA). With 100% financing my debt service ratio is still at an acceptable level - 1.21. Of course, vacancy may not be 10% but it is much better to be safe rather than sorry. Good luck with your deal.
Re: Multifamily Analysis Help Needed - Posted by John Butler(Stl)
Posted by John Butler(Stl) on April 06, 2000 at 17:14:59:
At first glance, it appears as though your expense figures are too low. Get the actual figures that the owner had for the past 3-5 years and use that to guestimate what the expenses under your ownership would be. To get my NOI, I usually take the scheduled gross and subtract out the vacancy factor for the area(usually 10% around here to be safe). Then I subtract out 33% of the scheduled gross for all expenses. In short. I use NOI=GPI*.9*.66 which in your case is $31,482. Quite a difference from the figure you have which changes the cap rate dramatically. I would then plug in my target cap rate that I like to pay(~13%) and get my target price to be $31482/.13=~$242,000. I would then subtract out any deferred maintenance that needs to be done from this number.
I run into properties all the time that have 75% of gross listed as the NOI because the owner manages it himself and does the repairs himself. If this is how you are planning to run the building as well, then you may have the same NOI he does, but when you want to sell down the road an investor will look at numbers similar to the ones I posted above to determine their value. BTW, from my numbers looks like he is asking too much.
Hope this helps,
John
Re: Multifamily Analysis Help Needed - Posted by Mark (SDCA)
Posted by Mark (SDCA) on April 06, 2000 at 13:20:28:
Unless you can “fix” this deal, I wouldn’t go near it. Under 1000 per year cash flow projected?? I would be looking for that much A MONTH on a property this size. Also, I would say your maintenance is low. 250 per unit per year?? THe price is too high.
Also, the 20 year amortizations are killing your payment. I would try to offer a wrap instead. That way you could lower the interest on the wrap and get the payment down so that the 2nd is not really adding anything to the monthly payment.
Cheers,
Mark
Re: Multifamily Analysis Help Needed - Posted by Dave
Posted by Dave on April 07, 2000 at 11:52:46:
Jim-
Thanks a lot for the input. Based on everyone’s feedback, I will raise my estimated expenses…
I understand how you arrived at the NOI of 28,620 but I am not sure how you arrived at the income stream value…? In addition, how did you arrive at the $178,875 price?
I knew that this was not a ‘great deal’ but am learning a lot from your expertise.
thanks.
dave.
Re: Multifamily Analysis Help Needed - Posted by dave
Posted by dave on April 06, 2000 at 13:30:51:
Mark-
Thanks for the quick response. I’ll expose my ignorance… how would you structure the wrap?
thanks-
dave.
Re: Multifamily Analysis Help Needed - Posted by Jim Rayner
Posted by Jim Rayner on April 07, 2000 at 17:35:25:
Dave,
Skip is right The maximun purchase price was arrived By applying a 16 Cap Rate to the NOI. This 16 Cap rate however is used for a reason, that being that if I were to do this deal using conventional commercial financing with 20% of my funds in the deal, I would need to purchase this deal for the 178875 price in order to feel comfortable that I would obtain my desired Rate of Return from the investment of my funds.
By applying various cap rates to a typical conventional 20% down commercial deal You can determine that my gross return on investment at the 16 Cap would be 35.59%. Since the first 10% is always air to borrow a phrase from my friend Terry Vaughan my realistic rate of return is really only 25.59% which is generally speaking my target criteria but I often accept less and often get in for much higher returns depending on the particular deal.
The value of the income stream was determined by applying a 10 Cap Rate to the NOI. This however would vary from market to market for example in my market right now the applicable cap rate for valuation varies from 10.5 to 11 depending on the property type and specific location. So I find that for simplicity when doing a quick review of a supposed deal a ten cap seems to reflect a pretty good value when you don’t yet know the specifics of the particular market.
I have found the world of commercial real estate to be a much easier area to work in since it really boils down to a number analysis of potential deals in a market that is not controlled by the emotions of the retail buyers.
Re: Multifamily Analysis Help Needed - Posted by Skip (CA)
Posted by Skip (CA) on April 07, 2000 at 14:14:35:
Dave:
It appears he applied a 16 cap to the NOI that was calculated. $28,620/16%= $178,875. Hope this helps!
Skip
Re: Multifamily Analysis Help Needed - Posted by Mark (SDCA)
Posted by Mark (SDCA) on April 06, 2000 at 13:41:17:
It’s hard to give you specifics without the numbers on the 1st and the 2nd. I would tinker with the interest rate on the wrap (lowering it below the interest rate on the 1st) until I got a payment I could live with that I thought the seller would accept. Basically, I would start with HIS payment and structure the wrap payment as HIS PAYMENT+.
I just had a thought… The 1st IS existing financing?? Or does the seller want you get a new 1st and then he will carry a 2nd?? That would change things quite a bit… Then I would want to know what the existing financing was. If there is none, you have a lot more options.
Mark
Re: Multifamily Analysis Help Needed - Posted by Dave
Posted by Dave on April 07, 2000 at 18:26:46:
Jim-
Thank you very much for the clarification and now I see your logic (I think…I’ll have to study this a while) Thank you!! I knew a straight 16 cap rate wasn’t going to be a hit w/ a seller…
dave.
Cap Rate of 16? - Posted by dave
Posted by dave on April 07, 2000 at 18:20:47:
Skip-
Thanks for the cap rate calculation. My only question is where can anybody get quality multifamilies w/ cap rates of 16? (I am not interested in carrying a gun to do my monthly collections)
Granted the idea is to look for motivated sellers (I understand that) but… I would like to get into rental property and the supply & demand ratios are mandating cap rates between 9 - 12. I am smoking something funny here? I like the sound of cap rates of 16 but no guns please…
Please tell me I am wrong.
dave.
Re: Multifamily Analysis Help Needed - Posted by dave
Posted by dave on April 06, 2000 at 14:08:01:
Mark-
On the first it it would be new financing. I have a relationship w/a banker and I know that they would give me (75% LTV)with the following
Purchase price $335,000
1st mortgage 251,250
rate 9.375
amort 20yr
annual payment 28,200
second mortgage - $83,800 seller financed
rate 8%
amort 20yr
annual payment 9,200
Any ideas would be appreciated…
dave.
Re: Cap Rate of 16? - Posted by Jim Rayner
Posted by Jim Rayner on April 07, 2000 at 20:19:03:
Dave,
The level of the Cap Rate at which you make an acquisition does not necessarily reflect the need to be armed to collect the rent. I have made purchases in the past year at cap rates of 19 and 21. The sellers were: one a tired landlord who was facing BK and was severely in trouble with delinquent taxes. The city agreed to a deal and the lender to a short sale on the 19 cap deal that was 13 months ago. After some cleaning, painting, and rent increases we have more than doubled the original cash flow and we still have a ways to go to complete this project. The other deal at a 21 cap was from an estate sale. the heirs did not want to be landlords and just wanted out. neither they nor the listing realtor realized what they were giving away. I paid their asking price! we have had this one 9 months and have after the same amount of work clean, paint and rent increases tripled the income from this deal. Both properties are located in national historic districts not war zones.
I also have been working with a gentleman from alaska who took down this week a 7 unit building at an unbelievable cap rate of 25%. this one is another i don’t want to be a landlord deal. like mine it needs some cleaning and painting and rent increases and some tenant turnover.
my market has enjoyed a less than 1 % vacancy rate for nearly 3 years now and market rents are climbing unbelievably but there are still some older landlords that are ready to retire that have just not maintained themselves at market for whatever reason. They are the sellers that i target for not only to i get a geat price going in but i get astronomical returns on the upside potential