There is a property I was looking at priced at $875,000. It was appraised at $1,200,000 and that was with a 25% occupancy. The building was previously used for several businesse offices. The zoing was changed to residential (multi family). The building was originally built as an apartent complex.
32 of the units currently need rehab. Which the estimated cost totalling $166,000. The average rent is $600 dollars. It is a 54 unit complex. Here is my question. What questions should I be asking the owner and how do I figure what this building can possibly cashflow a month.
I have plenty of experience in residental but not multifamily. How do I determine what would be a good investment and cover my debts and still allow me to cash flow. I have a basic knowledge and understanding of multifamily but I want to know more!
ask for financials. on a commercial deal they would typically expect to provide them.
the math works pretty much the same as SFH.
you have to have cash to get in to the deal; typically 20%, but I’ve seen 90/10 deals, plus cash to do the rehab and carry the note until you have tenants.
units x avg rent x occupancy = revenue
operating, mgmt fees, taxes, insurance, repairs = expense
revenue - expense = NOI. bank wants to see NOI coverage of debt service at least = 1.25
you probably want to see more than that if you expect to make money.
don’t forget repair/replacement reserves. all your stuff will break about the same time…
You need to do a lot of homework, but considering what you have stated - actually not much from the landlord.
Normally from the landlord you would want to get the last 1 year (I would prefer 2-3 years) of the income and expense records, but this information might not be very accurate ebcause of the apertment - to - office - apartment history. Still - the record of expenses will be very useful, as you probably can get a picture of expenses for the property. Just realize those expenses may change radicallyu when you go to a 90%+ occupancy.
One thing you need to discover is what is the basis of the appraisal. Obviously it wasn’t income based (the surest method) so probably it was based on replacement value of the building or some other method.
The main things you need to discover are:
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What rents can you expect to receive for the complex once the work is done to get a good occupancy rate. You have $600 but is that a solid, realistic number?
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What will be the expenses of the building when remodeled. A good percentage is 50% of gross rents.
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How much will it take to do the remodeling, including carrying costs in lost rents while the rehab is going on and before you can get the apartments filled. You’ll be paying interest on the loans for some months while the rehab goes on (2 months - 6 months - more?) Then when it is completed there will be a period of 6-12 months while you fill the vacancies. That means you will have a time of 4-18 months with a lot of money going out and very little coming in on a 65 unit scale.
For instance -
$600/unit rent x 54 units = $32,400/mo gross rents
50% is $16,200 NOI (Net Operating Income)
If you purchased at $865k, 10% down ($86.5k)
Rehab $166k ( I would feel more comfortable with a higher number for unseen problems)
Holding Costs $320k (Interest on construction loan/HML while renovating/taxes/utilities/lost revenue for 12 months for rehab and fill occupancy)
Total Investment $1,351,000
Monthly Mortgage (assuming 8% at 30 years) $9,905.82
Giving a positive cash flow, after all is said and done of $6294.18
based on an 8% cap rate, the apartment complex on an income standpoint will pop out at around a $2.43 million valuation. This would be a nice deal - assuming you have the resources to finance and hold the property for the time it will take to rehab and fill, assuming the rehab costs and projected rents are accurate. That will be the key. In a SFR you can get something rehabbed and rented in 2-6 months. With 65 units, it takes a lot more time, carrying costs and resources.