6 unit Analysis

General Real Estate Investing
1

Hello

I got a potential Deal on a 6 unit complex that was a probate lead
it is on the borderline of Oakland and Berkeley really close to UC Berkeley so Half of the tenants go there. It is totally rented out no vacancies and the shortest tenancy has been there 4 years with the longest being 11 years strong. ALL tenants pay own electric Individually metered

the numbers (Pro Forma) according to seller

MONTHYLY EXPENSES

INSURANCE $183.00

GAS & ELECTRIC $ 11.00 apx.

WATER $110.00 apx.

WASTE MANAGEMENT $132.00 apx.

CLEANING $ 40.00
Total: $476.00 apx.
$5,712 annually

Unit rents

#1 2bd w washer dryer hookup
$1375 low for the area should be round 2k

all others are studios

#1 – $1375
#2 – $760
#3 – $650 --This Unit needs total Rehabb
#4 – $790
#5 – $750
#6 – $750
total 5,075

$60,900 annually

60,900
-5,712
$55188 NOI

Asking 640k

now unit #1 lease has expired and may potentially move which could add value additionally his unit is the only one with access to the laundry via a door inside unit. however he is open to the notion of blocking off that door and building out into backyard for all tenants to have access to laundry where a coin op machine could be used by all tenants which would increase some income for the property.

please analyze and see if this if a workable deal. I have a week until all the legal court administrative papers are signed over to seller who by the way is an environmental lawyer nice guy tho. at which time he wants to sign a contract with me but has also stated he had an offer for 630k and if i come in a tad higher i could get the deal. he wants

10% down and the rest at closing no contingencies 15 day close.

your insight is much appreciated …

To Your Investing Success
Marcel
Quest4Success

2

Not a deal, from a cash flow standpoint. If the area is appreciating 10% a year, and you can wait five years for this to cash flow, then maybe. That’s assuming the rental rates will climb 10%, too. That’s iffy, unless you know better.

Otherwise, your NOI with management is gonna be about $2500/mo or $30,000/yr.

The debt service on this project is likely to be $25,000 with $200K down (30% down)

So, your cash flow is about $5K a year, if you have no hiccups. Well, one unit already needs a rehab, so it’s $200K plus the rehab/marketing costs.

This project offers a CAP rate of about 3.1%. The only reason there’s any cash flow whatsoever, is that you’re putting down a wad of money, and the market interest rates are currently overly low.

If you decide to buy this, you want fixed rate financing, and no short term balloons. Why? Because you’re not likely to see 4% rates on commercial properties anytime soon again.

If other six-plexes are selling for $100K/unit then maybe the rents are too low? Maybe there’s an appreciation play going on in this market? Maybe the rents are skyrocketing? Otherwise this is a mediocre deal, at best.

Of course, I don’t know Oakland. Maybe in your market this is an abject steal for six units.

Sorry to be so equivocal. There’s got to be more profitable deals than this.

What is the market CAP rate for project this size in Oakland?

Also what’s the standard, asking, gross rent multiplier on similar properties for sale.

The GRM for this property happens to be 10.3. That’s really high for any property, as far as I’m concerned; especially if we’re looking for cash flow. Cash flow may not be the play where you’re at. I don’t know.

Hope that gives you something to think about.

I think you’re a long way from worrying about this deal slipping through your fingers by putting down $63,000. That’s ridiculous.

I think you’ve telegraphed to the seller that you want this property ‘just because it’s a probate deal’ not because it’s actually a deal. So the seller is pulling your leg here about competing offers.

If someone is competing, let that sucker have it. Just saying.

I would make him and offer of $400,000 cash in 14 days. That would work. You could find a buyer and financing for that price, and only put down $80,000 …and it would cash flow nicely.

3

The deal is okay, however, is it 10% down or deposit? I am thinking deposit because it would be almost impossible to get 90% financing on a commercial loan. Make sure to run your mortgage scenario to make sure you have positive cash flow after debt service.

Also, 15 day closing and no contingencies should give you a pause. You need to find out why. 15 days to do all you due diligence is gonna be very tight. If you give him 10% deposit of at least $630k and you discover a major problem, no contingency means he keeps your money even if you back out of the deal.

4

joolkano

that is 10% down the owner says that the 15 day close is not set in stone if more time is needed then that is ok

javi

the GRM for the area that i have found is 6.2

there is no management on this building and no loans on it

cap rates for the area are around 7.5

hope this helps

thanks again guys

5

If the GRM is 6.2, you’re paying 10.3. Why is this something you want?

Even without management the CAP on this thing is 5.7%
[$60,900 less 40% = 36,540 / $640,000 equals 5.7%]

Again, why is this a deal?

$60,900 (GSI) x 6.2 (GRM) equals $377,580.

I wasn’t too far off in my estimate of value for cash. Hmmm.

You’re willing to pay twice that for cash? No.

6

javipa

thanks for the clarity I see there is no deal here

Let me clarify for you for a second I am only looking to wholesale deals gain some capitol pay off some debts and save to purchase more properties however these multi units are out of my range but i know many investors who are looking for properties like this .

I thank you again for your knowledge Javipa

:beer to you

7

Quest,

Don’t discount the opportunity to practice your negotiations.

Make an offer that makes sense for you.

$380,000 reflects the market GRM. So, use that as your ammunition for making a $380,000 cash offer.

It’s not a steal, or anything, but the rents are lower than they should be, and that’s the value play here; under market rents.

Of course the seller wants the price that reflects market rents. Well, he can go ahead and take all the risk increasing the rents to where they could be, handle the move-outs, and turnover, rehabbing, and then try to sell it.

Otherwise, he’s getting a fast $380,000 on an under-performing property.

Make the offer. Then keep tabs on the seller. Resubmit an offer in six months. Otherwise keep in touch, until he sells to someone else.

At this point, you don’t know why he’s selling, except that he wants to get cash. He’s not going to get anywhere near $640K. So, once he’s softened up, had a few management hassles, your $380,000 of fast cash might start sounding real attractive.

At this price, too, he’ll have zero activity or interest, apart from what he’ll perceive as low-ball offers.

Which brings me to my last point. When a seller is asking for the moon, I acknowledge his asking price and simply ask him if I can offer a backup, in case he doesn’t sell for the price he’s asking.

The seller will have any number of responses including, denial. But you want permission to effectively low-ball him yourself.

So, he says, OK, what’s your price. You don’t give it to him verbally. You say that you’ll write it up and give it to him. He might say don’t waste your time if it’s below “x” dollars. Ignore that.

Instead write up the cash offer and get it to him. Write a very nice short note to go along with it, even being apologetic for being such a low offer in comparison to want he actually wants. But, you’re a professional investor, and you have to make offers that “make sense.”

The point is to get some hard numbers for him to think about, and make sure he likes the way you come across and pull him out of his denial.

Always make offers, regardless of the seller’s attitude. Sellers change their minds. They get sick. People die. People’s lives and circumstances/motivations change like the weather.

So, you be the one they think of when they decide to accept your offer nine months from today.

FWIW

8

I agree with Javipa, put in a offer that makes sense to you. There are often great purchases made after working the seller like a boxing match. Take it round by round with the idea that if you don’t get it, its ok. You’ll live for another match.