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WOLLASTON WEDNESDAY #30: How 25 Apartments for $300,000 Is A Loser Of A Deal

We recently underwrote and turned down a deal in Holyoke, MA this past week. The numbers initially seem almost too good to be true, but I can assure you they're not. Let me explain how this project could be a bankruptcy attorney's next deal. haha

An attractive 25 unit, 4 story building was brought to us. It was for sale for $300,000!!! How can this not be a winner!

It had a small fire and was condemned by the city which immediately means it needs a lot of work. One thing we've learned through the permitting process of our commercial buildings, is that building departments are much more strict and thorough than they were before. Even for minimal renovation projects, building departments are doing full code reviews for your scope of work. They can work to force you in to higher levels of renovations than planned if you don't tread carefully. Because the board of health and building department has been through this means we need to be conscious of what the city will want to see.

(that's my sweet charcoal "work truck")

The units overall were in decent shape and had good layouts. But every unit needed a new kitchen and bathroom. All 100+ windows needed to be replaced and every unit needed some form of framing and sheet-rock work. However, the real kicker to this project was the heat, and electric to the building. All were inadequate to operate the building and required full service upgrades. The way the building was currently configured had the landlord paying for all of the utilities. That's a recipe for disaster. We won't purchase a building that doesn't have separately metered utilities. So while revamping this property, we budgeted to separately meter the heat, electric and water to each apartment. That level of renovation budget on a building this large is required and tremendously expensive. Renovating the building to a clean, safe and habitable future came with a budget of approximately $1,000,000. Let's see if this will be a money maker.

Spoiler alert - it's not a money maker. What really hurt this building is the fact it needs so much work and it only has one bedroom apartments. They can rent for approximately $850 a month but that's just not enough to make this deal worth it. You know we like to refinance our properties to recoup the hard costs; so I need this property to perform with a $1.3 milllion dollar mortgage at 5.5%. As you can see, the cash flow after debt service is poor. I don't want to spend all this time renovating a project that yields me $100 a door a month once it's renovated. We could make this same amount of money on a three family in Brockton. That metric is enough to have me walk away.

If you look at the cash position for this project, it doesn't make any money. It also doesn't cover the mortgage enough to let us sleep at night. At minimum, I want a debt coverage of 1.5x - all of our current projects are over 2x the DCR. With the cap rate of 12%, it doesn't appraise high enough to get all of our money back. This deal unfortunately is a loser from every angle. Don't be sticker shocked by real estate. It's important to read between the lines and really analyze projects. Once you learn how to do it, you can reach quick back of the napkin numbers like this is in under 5-10 minutes.

Feel free to reach out! We're always willing to help!


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