Looking at 4-plex

Purchase price $42M
rehab cost ($5M/unit) $20M
closing cost $2M
holding cost (int. while rehab) $2M

total cost $62M

20% down $12M

Finance $50M for 12 yrs @7% pmts at $514, est insurance and taxes at $200/month.

These are 1 bedroom 1 bath each. Average rent in this area is $400 for 1 bedroom. Section 8 housing voucher in this area is $396.

Rent 400 x 4 $1,600
vacancy (15%) $240
Management (10%) $160
Maintance (10%) $160

NOI/month $1,040

monthly pmt, taxes, insurance $714

Positive cash flow $326

Sound like a doable deal?

Why would you spend $42 million to get a $326 a month cashflow? Surely, you mean $42K…!!!

The payment of $42M at 7% is $279,427.05 per month fro 30 years! Serious negative cashflow!

All that aside:

– what will be the estimated ARV after you complete rehab?

– why 12 years?

– why the high vacancy rate (just caution?)?

– what needs rehab? You have 4 apartments plus the exterior of the entire building, is $20K enough?

– how long do you expect the rehab to take? As for holding costs, the taxes, insurance, and utilities go on while the rehab is in progress.

– what are the actals on taxes and insurance? (You don’t want any surprises!)

The rest looks like it is in the ballpark…

Other than my above-expressed concerns, it looks do-able – a little thin, but do-able. If you get your vacancy rate down, that will help quite a bit – I would shoot for 5%. Also a 30 year mortgage for the same amount is $280 and by applying another $170 a month in accelerated principal payments you will still pay the note in 12 years AND save yourself over $9,000 in payments…



Thanks for your response Keith. Now I will try to answer your questions.

I actually write alot of financial analysis in my job (I work for the US treas Depart). In our writing upper case M reprents 000’s; therefore, $42M would mean $42,000.00. Sorry for the confusion.

Why do we need to know the ARV if I’m not re-financing after rehab is completd? My idea was to get a credit facility that has an advance period for rehab expense and then start a re-payment period (12-yrs). Maybe a financial institution will need an appraised valued after rehab to lend against, but I don’t think I will have much trouble getting financing with 20% down, a conservative debt service coverage ratio on the project of 1.46x (1,040/714), an aggressive amortization of 12-yrs, and my personal credit score north of 800.

But if we look at the income approach of an appraisal; 1) NOI of $1,040 X 12-months equals $12,480, 2) cap rates almost always come in about 10%. The income approach would support a value of about $124,800 ($12,480/10%).

Why 12-yrs? This is an arbitrary number, but the idea is to get the property paid off as quick as possible while still maintaining a decent positive cash flow. I don’t need the cash flow to live. You say I could save myself over $9,000 in payments with a 30-yr mortgage if I pay an additional $170/month. Are you saying that this is $9,000 less than the 12-yr mortgage I had originally listed in my scenario or is this $9,000 less than the 30-yrs mortgage? Also, why put this on a 30-yr mortgage and pay ahead versus going ahead and putting on a 12-yr mortgage, when there is positive cash flow even with a high vacancy rate at the 12-yr.

The high vacancy rate is just caution. I like to try an think of a worse case scenario and if I can live with that anything above that is gravy. Now I know this is not the worse possible case but if I truely looked at the worse possible case I would never do anyting. In fact, I would probably only invest in Cains & Mason, Inc. You know, Cains coffee cans and Mason fruit jars.

What needs to be rehabed? Exterior is fine. Interior will be new flooring (carpet and linoleum) and paint. My $5,000 per unit maybe high, but again I would rather be conservative.

How long to rehab? I was roughly figuring 6-months ($66,000 @ 7% X 0.5 or 1/2 a year is approximately $2,000).

What are the actual taxes and insurance? At this point I don’t know the actual numbers but I think $200 per month is going to be pretty close. If taxes and insurance is higher, I can alway increase my amortization or reduce my vacancy rate. Its amazing how erasers can make real estate projects work.

Keith, I looked at my analysis again and the holding cost (interest while rehabing and leasing up) is as follows:

Cost of property $42,000
Rehab cost $20,000
Closing cost $2,000

Total $64,000
less 20% down $12,000

Loan $52,000

Holding cost = $52,000 @7% = $3,640/2 (1/2 a year) = $1,820 rounded up (again conservative) to $2,000.