All bills paid apartments
So I have a piece of industrial property set to close on August 4th that I will walk away from with a good chunk of change. I have one SFR and have been saving and wanting to jump into small apartment buildings. There is a local 8 unit (two separate buildings, I am not sure of the exact layout yet) 7 are 1 bed 1 bath and the last is a 2 bed 1 bath unit. The smaller ones rent for $399, the lager for $599. This was built in the 20's and is not brick, it is a wood frame building. It is not in a horrible area, but not great either. I need to see insurance, utility bills, bank deposits (to make sure rents are being paid), any other bills for the property (trash, lawn care...). Am I missing anything? Should I be running for the hills or do some digging on it?
You said all bills paid. So I am assuming landlord paid utility included in the rents.
399 X 7 units = 2,793 a month
599 X 1 unit = 599 a month
Combined = 3,392 a month X 12 = 40,704 gross expected income.
Take away 65% annual costs ( older building from the 20's and all seller paid utility ).
40,704 X .35 ( 65% costs) = 14,246.40
Price at a 10 cap is roughly 142,000 or 17,750 a door purchase price. This is before any deferred maintenance with the property. Mostly 1 beds and low rent tend to have increased turnover and damage to the units.
Personally unless you could almost get this property for nothing it doesn't sound that great. The low income and low rents tenants are a lot of work and there has to be a really high cash flow return to compensate. Generally sellers understand it's more work which is why they are selling to go into a different type of asset or size. The problem is the sellers only discount the cap rate maybe 100 basis points when it needs to go much lower.
You pretty much covered everything.
I would investigate the property. Hire an inspector to check for termites or wood decay.
It is listed at less than that, by quite a bit actually. It is listed at 99K, I would be making a cash offer. I would like to have a PM take care of it which would take away some of the profit but hopefully most of the headaches too! There are a few pictures online, and it is an older place but does not appear to be falling down anywhere, which is a good sign! I will get some utility statements (I think they will be very high, I don't even want to guess) and do a drive by and see what my gut is telling me.
On the PM on those types of properties do not be cheap and calc 7% or something.
In a iffy area collections will be more intense along with turnover. It takes a special PM that focuses on that market segment. I would calc 10 to 12% fee and a bonus structure to PM.
A good PM on a property like that is like gold otherwise you are buying yourself a JOB.
@Bily Elliott I think you should run for the hills faster than Bugs Bunny running away from Wile E Coyote. I say that for 3 fundamental reasons:
1. All Bills Paid. Unless it makes financial sense to convert to separate meters I'd stay away from all bills paid because it's highly likely you'll always be chasing dollars trying to make up the money that your residents are spending on their cooling and heating comforts.
2. Build in the 1920s. Deferred maintenance. Lots.
3. Area. Your description of "not in a horrible area, but not great either" is the nail in the coffin on this deal (for me, anyway). If somehow, this was in a B neighborhood trending to an A then, perhaps, I'd look into it. But, a C or (gasp) D neighborhood on an all bills paid property?! Yikes, you don't want this deal.
Don't....do...it!
That was my initial thought! I still want to get some numbers so I can run them so I am more comfortable that when I do find a good deal I am confident it is a good deal.
@Bily Elliott- yep, I like that approach. I would do the same thing.
So, a little more information about this deal. It is in fact a 10 unit (2 more 1 bed 1 bath, but they are in the basement and have seepage when it rains heavy) not an 8 unit. Utilities for gas, water, trash, sewer average $770.00 per month for 2013 according to the realtor (she included a copy of tax returns showing almost 24K income and almost 10K of utilities) the last three years have been 10K, 9K and 9K reported utilities costs. They have also considered owner financing @ 6% with 25% down and a 10-15 year term.
Can you clarify 24k income? 24k in NOI? How much maintenance did they expense? Verify the capital improvements over the past three years as well. The other posters have done a good job at outlining the problems in the deal. Area is definitely a big problem and something that you cannot fix. However if the area is a solid C area then it might be okay. It also depends on how it is trending. The other large issue is deferred maintenance. A 1920's building either requires a solid rehab/gut or a lot of recurring maintenance. I'm not promoting the deal however if you could separate the utilities (or most of them) and pass on the expense to the tenants you could definitely help your bottom line. With that being said be extremely cautious of this deal. Is this an area you are interested in investing over the long haul? If it's not then I would pass. Good luck!