Thoughts on this deal? | 12-suiter fixer upper | Would you do it?

[MonteDobson]

Hello fellow investors,



I am looking for some feedback on a deal that I came across on a 12 suite apartment building in Regina, SK. Here is the story and details of the deal.



I came across a 12 suite apartment building in a C area that has been condemned by the city (due to poor mgt, drugs, hookers and disrepair etc). The building has been vacant for about 6 months and the previous/current owners have "attempted" some renovations to bring it back up to city standards, but it's got a long ways to go and the owners are from "afar".



I looked at the building today and 6 of 12 suites are horrid and almost want to make you vomit at some of the things that I saw (I will spare you the details). However, it is mainly cosmetic and cleanup, and the structure of the concrete block building is excellent! The location is somewhat questionable, but the area is in a slow transition with some revitalization plans occurring within city planning.



The building consists of 12 large suites including, 4 x 2 bedroom (800 sq ft) and 8 x 1 bedroom (735 sq ft). It also has 11 parking stalls and is close to downtown Regina.



Here are the conservative numbers once the building has been "normalized":



Asking price: $595,000 ($49.6K/door)

Proposed purchase price: $480,000 ($40K/door)



Potential Revenue:

• 2 bedroom -> $850 x 4 = $3400/month ($40,800/yr)
• 1 bedroom -> $725 x 8 = $5800/month ($69,600/yr)
• Laundry -> $200/month ($2400)
• Total Potential Revenue -> $9400/month ($112,800/yr)
  
  Operating Expenses:
  
  • Property Taxes: $5745
  • Prop Mgt (6%): $6408
  • Insurance: $3000 (estimate)
  • Utilities: $17500
  • R&M ($500/unit/yr): $6000
  • Garbage removal: $2000
  • Misc: $5000
  • Total Expenses -> $45,653
    
    Financial Overview:
    
    • Gross Revenue -> $112,800
    • Less Vacancy (4%) -> $4512
    • Net Revenue -> $108,288
    • Less Operating Expenses: -> $45,653
    • NOI -> $62,653
      
      The "proposed" offer:
      
      
    • $480,000 or $40K/suite
      $100K down and seller will carry remaining $380K @ 4%, interest only payments of $1267/month for up to 14 months (and no payments for the first 60 days)
      Seller is willing to finance during renovation stage and re-occupancy, then would obtain conventional financing via bank and CMHC, hopefully up to 80% LTV of normalized rents etc.
    Building upgrades budget:
    
    
    New boiler -> $20,000
    Common areas -> $20,000
    Exterior and landscaping -> $20,000
    In-suite renovations ($12,500/door) -> $150,000
    City permits and red tape fund -> $10,000
    Contingency Fund and interest payments -> $25,000
    Total upgrade budget -> $245,000
  Final Analysis:
  
  
  Purchase price: $480,000
  Down Payment: $100,000
  Renovations: $245,000
  Total Cash Required: $345,000
  Price In: $480,000+$245,000 = $725,000
  Post renovation value @ 7 cap rate ($62,653/7%) = $895,042 ($75.6K/door)
  80% financing = $716,033
  Equity take out available (20%) = $179,008

Another strategy would be to condo-convert from day 1, upgraded units would realistically sell for $95-105K. Sell off 5-6 units to pay off financing/expenses etc and own the remaining units free and clear, and seller is willing to finance and partially discharge mortgage as units are sold.



Please provide your candid thoughts and/or suggestions...thanks!

 

[Thomas Beyer]

The question you have to ask is "are the rents realistic for the area ? Are the rents sustainable or will you spend lots on turnover/after eviction?"



I assume you know this area of Regina well .. will it turn around ? .... as some areas of any city never will !



Your contingencies (25K) while upgrading are probably too low as you will have to pay utilities, interest, onsite manager, management fees and security while semi-vacant.



So yes it would work well if your numbers are accurate, as you will own a building with no cash after a year or 1.5 years.

 

[MonteDobson]

Thanks Thomas,



Yes the location is a bit questionable, and I believe I have been conservative on expected rents (but will do some more due diligence).



Also, I forgot to factor in a "fort knox" quality security system...what can I expect this would cost??



The city plan is to revitalize over the long term (although it is just a plan at this point). Here are a couple of links outlining the details. The location of the building is just north of the existing Mosaic Stadium.



City of Regina PLan



City Youtube Video

 

[REINteam]

I would take a look at your vacancy estimate of 4%. Considering this is a rough area, the building is junk now and may have a bad reputation, the tenant profile is questionable...I would double your vacancy estimate to allow for one unit vacant per month, so around 8%.



Looking at the financials on quite a few buildings lately in areas that are probably better than what you're describing and it isn't uncommon to see 17% vacancy or higher (mismanagement, bad area, unmotivated owners, down market, etc). Granted this would be an upgraded building AND you would hopefully have great management...you could still see pretty solid turnover with the tenant profile for the area.



Expenses would also probably be increased, as mentioned by Thomas, due to turnover, repairs, evictions and arrears based on the description of the area and the clients you would attract.



Take a look at the water heater(s), roof, appliances and windows as well...how much life do these items have left?



Could be a great deal as long as you have access to cash, solid renovation team and great management. As Thomas said above, I would anticipate more than $25,000 in contingency fund...at least have access to additional funds as this deal needs some deeper pockets.