Underwriting Tips: Case Study of an 8-Unit Property

Dylan Koch: [0:00] Hey, everybody. This is Dylan. I'll be doing the Friday focus for you guys today. I am going to go over the underwriting, that eight unit property that I just bought here in Cincinnati. I'm running you through the math I use when calculating the deal, if we should buy it, if we should sell it, and just hoping to show you some of the metrics that I look for and and some of my investments. So to start off, this is a eight unit building on the West Side Of Cincinnati in a decent school district. It was a mixed use building before we bought it, It had been run down for years. And actually, this was a direct to seller. It had four units on the top. They're all one bedrooms. And below it were basically mixed use office buildings. Two of them were vacant, really run down. One unit was currently had someone living as as residential. And then the back right unit was pretty much gutted. And the place is in pretty much disarray. The city had gotten a hold of it too because of some zone violations. It actually wasn't permitted or residential at the bottom, and it needed permits for that. So the city got involved. And that's ultimately why this seller wanted to sell. He didn't have the money to fix it up.

Dylan Koch: [1:07] He was honestly pretty much a slumlord. And so he was pretty motivated to sell. We got it for 190,000 And I kind of worked these deals from the backwards to the front end. And so based on sales in that area of other multi unit places, I think a conservative estimate is about 80,000 per door. And you can also do this via the financials, like what we'll get into. So eight units, those 80,000 doors, about $640,000 would be the back end, like ARV number that I'm kind of anticipating once it's all said and done. On the pro form a side, I mean, rents really didn't matter. He was getting like 600 a month for the four upstairs. But again, because they're in like disarray, we needed to get them out anyway. We ended up doing cash for keys, and all of them left, which was awesome because these leases were a little bit too long. On the underwriting side for the one bedroom, I estimated $900 per month, and at the two bedrooms, maybe $1,200 a month. There are six one bedrooms and two two bedrooms. We're gonna actually turn one of the mixed use the commercial spaces into a two bedroom. And I got these numbers sim simply from one, kinda knowing the area, two, Rentometer is a good source I use out of the pro account, and then just looking at Facebook Marketplace, Craigslist, Zillow, just kinda gauging what is currently available for rent around there. So all in, at 900 for the six one bedrooms and 1,200 for the two bedrooms, the total gross monthly rent is $7,800 per month.

Dylan Koch: [2:34] Okay? And then we are gonna factor in taxes. So in in my area, they get reassessed every three years. I actually reassessed it at what it's going to be. And this is actually like conservative underwriting because they'll see the purchase price of 190,000. And they probably won't adjust, you know, accordingly to the at least the new value. But taxes are $728 a month. Insurance actually will go down because right now I have the builder's risk policy on it, but it's about $425 a month. And then I ran a out of the ARV is six forty, 75% of that's 480,000. Principal interest is 7.25%, which is $3,469.47. So my PITI on this building is $46.23 and 15¢. Now you take in, I do three percent for vacancy, CapEx, and maintenance. So it's like 9% off gross income, and then 8% for management, which I have an assistant now that will manage this property for me, but I still kind of factor that into the underwriting. We will have to pay some water and sewer in our area. It's about $60 a a unit. $560 in water. We'll have some common area electric, which I estimate at $75 a month. We have a like a dumpster there, which is a $120 a month, and then lawn and stone service, just another $75 a month. And that's also because of grass cutting, stuff like that. So our total those expenses are an additional 2,156.

Dylan Koch: [3:57] And so if you combine the PITI plus those other expenses, you're at $6,779.15. Take that gross income minus those total expenses, and your cash flow is $1,020.85, or $12,250 annually. Going back to the beginning of this is we're buying it for $1.90. Our rehab budget's like $2.65, have some hard money costs in there, some carrying costs. My total all in right now is calculated at 486,500. K? And that 75% of the ARV is 480,000. So my total out of pocket on the pro form a side is $6,500 when I go to refi this thing and add up all the carrying costs along the way. Not including about halfway through this rehab, we'll rent out the top four units. So that will count as some income that would, you know, help offset some of these. But now you're looking at a cash on cash or an ROI, ROI, my $6,500 out of pocket, over $12,250 a year in annual cash flow with all set asides, that cash on cash is a 188%. So I mean, a cash on cash is pretty good. Plus for $6,500, I created a $160,000 of equity. And this is kinda why the BRRRR strategy is so popular. You know, you're creating a $160,000 worth of equity for $6,500. You have a positive cash flowing asset, and you're recycling this money. All of this is a 100% funded by hard and private money, So I don't really have any money out of my own pocket. Going a little bit further, calculating us on a different basis, is if you just take the total expenses outside of the principal interest payments and to calculate your net operating income or NOI, that is $53,883 a year. So if you take that $53,883 over the $640,000 ARV, then that's a cap rate of 8.42%, which I would say is pretty on par with that area of anything that's probably a little high. So if you were to actually calculate this at, like, a 7% cap rate based on the NOI, the value is around 770,000, which I don't think you'd get that for this particular area.

Dylan Koch: [6:02] But purely from a cap rate's perspective, that's what it would call for. The other thing we kinda looked at is the DSCR. That's what the lenders, like a bank is gonna look at too on the on the refi part process, especially if you're using a DSCR lender. So DSCR is debt service coverage ratio. And typically, they wanna see anything above a 1.25. So basically, that is, you know, what is your cash flow over what is your monthly payment principal and interest. And ours right now is 1.29. So lenders are gonna see that, and they'll be happy with that underwriting as well. All in all, this is a very large rehab. And so the timeline, I'm estimating to be around six to eight months. We're actually a little bit ahead of schedule right now because I was able to get those other tenants out quicker than I thought. We didn't end having to pull permits, pull plans. Because the city was involved, I made sure that the zoning was approved. One of the bigger surprises we've had with this property is it is adjacent to a bar and grill, where you would think that the owner of this property would be delighted that this, you know, this eyesore property that's been adjacent to this has been finally being uplifted and revitalized. And it'd be good for his patrons or everything, right?

Dylan Koch: [7:08] But he has turned out to be quite a pain. For example, when we were putting on the siding and the new windows, we had like ladders and stuff. And technically in his parking lot, we weren't impeding on his customers. We weren't really in the way. We were just kind of using some of his space, because there's not a lot of space in between my building and his parking lot. But he ended up even calling the cops because we were, quote unquote, trespassing. And even the cops are like, dude, like, you know, I don't really understand why he's doing this, but technically, he's right. So that's that's gonna have been a pain. But other than that, like, this will be a good cash flowing property for me. It is something I plan to keep long term. One thing I kind of look at too on my portfolio allocation is if you have ample reserves already set aside, like, yes, you have to under account for those spam expenses, the vacancy, CapEx, maintenance, and all that kind of stuff. But if you already have the reserves, like, you can that's extra cash flow that you only have to dip into when needed. So adding that up, that's another 600, almost $700 in extra quote, unquote cash flow that I'll have because I already have the reserve set aside. If you have any questions, feel free to DM me, Dylan underscore Does underscore Deals on Instagram. I have been sharing some of the progress pictures with this property, and we'll see how it goes.

Dylan Koch: [8:20] Maybe I'll come back when the refi process happens and see how accurate my underwriting was. Thanks, guys, and I hope you have a great day.