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Attn. Multi-family experts!! I am looking for information related to expenses on Edmonton Multi-family...

Lucas

Lucas

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I am analyzing a deal right now that has me purchasing a 20 suite apartment building in Edmonton.



There are a few numbers I am not too clear on and would appreciate help from experienced Edmonton Multi-family experts.

  • Due diligence costs (i.e. general inspection, boiler inspection, roof inspection, bank appraisal etc...) - As well, if there are other applicable costs associated with due diligence, please let me know.
    [*]What would the utility costs be for a 20 unit building (built in the 70's)? I am only looking for an estimate for preliminary numbers. The owner does NOT have accurate records of these as the building has been vacant for 2 years!!
    Taxes     on a 20 suite building on a larger lot.
    Insurance    .
Feel free to impart your numbers on ALL of the expenses you include when analyzing these deals. As well, feel free to outline your "target" numbers (i.e. CAP Rate, Cash Flow, NOI etc.) when looking at Edmonton buildings.



Thanks in advance!



Lucas Fausak
 
To clarify...



Utilities being the heat (central natural gas boiler w/ baseboard heat), water/sewer, electricity and garbage.



Thanks again!!



Lucas
 
Appraisal 3k to 4k, building inspection similar, phase 1 environmental similar,



1% mortgage fee ...



Utilities about 25,000 to 28,000 (more if big units or poor insulation) ...



CAP rate between 5% and 6.5 on actual numbers ..



Budget about $3600 to $4000 per unit per year in total expenses ..



Taxes about 0.8 to 1.0% of property value (taxes will go up to actual purchase price for 2012 .. So don't use seller's tax assessment that may be 30-50% lower !) ..



How will you finance a vacant building ?
 
Thanks Thomas.



The seller is offering 100% financing. There are some repairs so I intend on completing those and tenanting the building. Once fully tenanted, I will seek bank financing. The seller has agreed to continue carrying up to 50% of the financing.



We have to finalize a price though. I am going to work backward on a 6.5% CAP based on 95% of the average market rent, less the cost of the repairs. I am trying to pull together realistic expense costs (not necessarily overly pessimistic) to arrive at this number. Your numbers help ALOT!!



Thanks again!!



Lucas
 
Maintencne and vacancy vary widely in the city. If you're in Eastwood or Westwood you can see easily double the costs in better areas.
 
Thanks Chris. I appreciate your comment. It is definitely important to try and get relevant and specific data when do the analysis.



I am looking in the west/central (Inglewood, Westmount, Sherbrooke) area of the city. What are your thought pertaining to multi-family buildings in those areas, specifically related to the vacancy and maintenance.



Thanks again,



Lucas
 
Thomas,



In analyzing the debt service, what can I expect for an interest rate and amortization period. I used 4.5% and 30 years. I will eventually going to the bank for 50% of the purchase price.



As well, what would you consider a fair offer on the seller financing portion. We had discussed 5%/40 year amortization w/ 100k down.



The building needs some work to bring up to rent-able standards. It was agreed that the costs of the renovation would be taken off the purchase price (I am estimating 100k).



After doing the cashflow on 6.5 CAP, 4k/door expenses and the above debt service (100k down to the seller and 100k off the purchase price for reno's), I come up with a cashflow of 1799.93/month. Which in my opinion is low considering the work and the risk. Is this margin of cashflow acceptable and/or accurate?



One other question; is the 4k/door include an on-site manager?



Thanks,



Lucas
 
[quote user=Lucas] I am going to work backward on a 6.5% CAP based on 95% of the average market rent, less the cost of the repairs.


MINUS financing costs

MINUS negative cash-flow for a half vacant building

MINUS work effort

MINUS risk



Ask: why is it vacant ? Crappy area ? What degree of deferred maintenance ? was it frozen during winter i.e. broken pipes hidden behind walls ? mold ?



A construction project essentially !



OK at the right price for the right handy person with a crew and realistic expectations !



A nightmare for everyone else !



Step 1: building inspection including NUMEROUS tests behind walls !!



Step 2: costing of all repairs .. then double that and deduct from price !



Step 3: realistic assessment of rents for area .. as some areas do not support fancy upgrades ! What part of Edmonton is this ?
 
The building is not in REALLY bad condition. The reason it is empty is due to the fact that the owner had a bad experience and is not capable of turning the project around due to age, abilities etc...I agree with the testing BEHIND the walls.



I think that I can defer payments (it will be seller financed for the first 12 to 18 months) until I have enough income to support the payments (interest only at 5%).



I do have the contacts to complete this building.



The area is Westmount/Sherbrooke. I like the area and I like the building. I would not do fancy upgrades...basic rent-able suites.



I looked at CMHC's report to establish the average rents in the neighborhood.



Thanks,



Lucas
 
Take TWO experts with you that are completely unbiased: a property inspector and a property manager. Ask them what has to be done to this building to get it rented. Within an hour you will know what is required.
 
Thanks Thomas...



I really like that idea.



Are there two professional in Edmonton that you'd recommend? ;)



Thanks again for your advice!!



Lucas
 
I like the west end more than some of the other side of town. There's several large projects near Westmount mall that are big competitors. I think in general they pull decent tenants and the farther you get from downtown the better they get. I've helped manage some along 118th Ave and 124th St both which bring slightly rougher tenants, thus higher maintainence costs on turnover. That said, you've gotta manage it right. I remember one building in the area where the perfect resident manager was a probably functioning alcoholic, but did a great job keeping the place ship-shape and the tenants on track. I like Sherbrooke (and Dovercourt) both, and think they'll improve as we go. Inglewood I still worry about the impact the empty hulk of the Charles Campsell Hospital is having and what future development will occur there.



There's some inventory south of 111ave between Groat and 142st that I've always been curious about.



In general the further you get from the corner of 118&124th the better you get - less maint costs from abuse, lower vacancy and better rental upside - but there's some good buildings the area for the long run.
 
If this property has a FOREST in front of the property, on 118 Ave, then there is a real story behind the building.



This is empty due to the owner, not the property.



If you getting 100% financing, then you also get 110% of the 1st mortgage holder looking over your shoulder.



I looked at this project back in 2004 and passed. It has not changed since then.



Good Luck.
 
[quote user=ThomasBeyer]Budget about $3600 to $4000 per unit per year in total expenses ..







Hi Thomas,



Does this $3,600-$4,000 estimated annual expense/unit include regular renovations from time to time

upon move outs? i.e. new paint, new flooring/fridge/stove if needed.. or that's extra?



Of course we're talking about averages/estimates anyway, just curious to know if $4000 is supposed to include those periodic renovations (every few years on average/unit I guess).



Thanks & Regards,

Nir
 
[quote user=Nir]Does this $3,600-$4,000 estimated annual expense/unit include regular renovations from time to time

upon move outs?


it includes minor R&M to keep rents FLAT .. say a new fridge every 20 years .. a new carpet every 15 .. fix dings in the wall .. new lightbulbs ..



so NO, it does NOT include upgrades on tenant turnover .. and that's why your "cash-flow" usually gets eaten up in these ongoing renovations .. but: they tend to increase the rentability and thus, rents, and thus, property values ! This is how you become a millionaire in multi-family ! One fixed toilet or new laminate flooring job at a time !!



It also does not include capital costs such as a new roof, a new boiler, new windows .. and as such, counting those CAP rates are actually lower than frequently stated on realtors' pro-formas !



Using the rule of 150, i.e. for every $ in NOI increase per month the property value goes up $150 it makes sense to upgrade .. but it eats into the cash-flow frequently making it negative.



150 = $1 * 12 month in a year divided by an 8% CAP rate = 12 / 0.08



Thus, if you renovate, and rents go up $100, with an NOI of perhaps $80, your suite goes up in value by $12,000 ($80 * 150) ! Thus: spend a fraction of $12,000 .. say $3-4,000 on these upgrades if you can get $100 more in rent !



Thus, on a 20 suiter with $100 rent incraese, say in 2 years .. a value increase of almost 1/4 million !! Sweet !
 
Thanks Thomas, what an excellent and important explanation!



Nice calculations too. My only comment is I think more accurately when rents go up $100, NOI increases by around $60.



The reason is: as we learned in the great Multi-Family event, operating expense ratio is usually between 32-48%. so if we take the average 40% you get around $60 increase in NOI.

so in the example of $100 rent increase it will result in a value increase of around 180K !! Sweet ! :)



I understand you have seen cases in the field where increases were indeed higher than the NOI multiplier of 0.6. my guess is that in most cases it was not a sale and a combination of the following explains the higher increase in value you saw: your building's area's CAP has dropped (hence value increased) or/plus a nice appraiser never hurts too :)



Regards,

Nir
 
[quote user=Nir]operating expense ratio is usually between 32-48%.


not quite .. as many expense are FIXED .. such as insurance, utilities, onsite salaries, R&M .. REGARDLESS of rent .. the lower the rent the higher the expense ratio!
 
Hi Thomas,



Would you assume expenses to be only 20% of the rent if you were the potential buyer of a newly renovated building/apts?



Proving my point is beyond the scope of the forum. Basically, related to the fact it is statistically correct to assume expenses will still fall in the range. Good point though - perhaps closer to 32% than 48%!



BTW, another factor than can definitely explain the gap mentioned above, is if you bought below market value.



Regards,

Nir
 
There is a difference between add'l rent and its associated expenses and average rents/expenses. Ditto with taxes : there is the marginal tax rate and then there is the average tax rate.
 
[quote user=Nir]Hi Thomas,



Would you assume expenses to be only 20% of the rent if you were the potential buyer of a newly renovated building/apts?



Proving my point is beyond the scope of the forum. Basically, related to the fact it is statistically correct to assume expenses will still fall in the range. Good point though - perhaps closer to 32% than 48%!



BTW, another factor than can definitely explain the gap mentioned above, is if you bought below market value.



Regards,

Nir


You're doing the math wrong. Example:



1000 monthly rent, 40% expenses of $400.



Increase of $100 per month rent, and $20 increased expenses gives rent of $1100 and expenses of $420.



420/1100=38.1%



So even though increased expenses were only 20% of the increased rent, the total expenses decreased only approximately 2%.



Regards,



Michael
 
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