20 Unit in Olathe, Kansas (Kansas City Area) Analysis

[Anthony Gayden]

Here is yet another multi-family deal analysis that I am doing. This one is a 20 unit apartment complex in Olathe, Kansas, which is in the Kansas City suburbs. The location is near downtown Olathe, which is older and a little rougher than other parts of Olathe, but still a relatively good area. The rental vacancy rate for Johnson County is 94-95%. The county appraiser has the building valued at $561,000 for 2014. This building is listed on the MLS here.

Asking Price $737,500

20 Units

built in 1979

8 are 2 bed/1bath, 11 are 1 bed/1bath, and 1 is a studio

Gross Income $128,460 (average $535.25 per unit a month)

Owner pays water/sewer/trash

Financials:

They were not provided in the listing, so I am estimating on some costs.

Down payment $184,375 (25%)

Mortgage Estimate $3650/month (estimated 5 year balloon, 20 year amortization, 5% interest, 25% down payment)

Vacancy Loss $12,846 (10% estimate)

Adjusted Gross Income $115,614

Property Taxes $7975 (2013 actual amount)

Insurance $3500 (estimate)

Maintenance $12,846 (10% Gross Income)

Water/Utilities $14,400 (estimate $60/month per unit)

Property Management $12,846 (10% Gross Income)

Operating Expenses $51,567

Net Operating Income (before financing) $64,047

Annual Mortgage $43,800

Income (after financing) $20,247/year, $1687/month

Cash on Cash Return 10.98%

Am I underestimating key costs here? Any advice in my analysis would be helpful. Also, I have no clue how much closing costs would be for properties in this price range getting financing from smaller local banks. 

[Brie Schmidt]

@Anthony Gayden Looks like you got it all.  What is the average cap rate in the area?  It looks like it is a bit overpriced and would be worth $640k at a 10 cap

[Giovanni Isaksen]

I think you meant to say the occupancy rate is 94-95% right? The rental market there isn't 95% vacant is it?

[Anthony Gayden]

@Brie Schmidt  i will have to research the average cap rates for the area as I am not sure. The cap rate might be a little lower than 10 in this area of Kansas City since it is in Johnson County which is one of the nicer suburban areas.

@Giovanni Isaksen Yes you are correct, I got that backwards. 

I appreciate the help, I am practicing evaluating deals while I work on raising funds for my next purchase.

[Mark Breaux]

Using rough numbers assuming 30 year amortization with 25% down and 6% rate, and using 50% + debt service for expenses, I get $24,462 for yearly income. At $737k, your cash on cash return would be 13%. That is a good deal to me...

[Anthony Gayden]

@Mark Breaux  Yes, with 30 year amortization, the numbers work out even better, but I did my calculations using a more pessimistic 20 year amortization. 

In terms of numbers, it doesn't look bad, but of course there could be a ton of deferred maintenance, or other issues. Thanks for the insight. 

I am just making a guesstimate, but I would probably need $250,000 cash to purchase a building at the list price. That would give me enough for the 25% down payment, the closing costs, and some emergency reserves.

[Mark Breaux]

Good point on the deferred maintenance piece. Let me know if it is something you would want me to run by. I am not far. (not soliciting for a partnership or anything; just offering help.)

[Account Closed]

Cap rates in Olathe are likely 7% or lower these days. Maybe a little higher on this size deal. But multifamily in Olathe is in demand right now.

[Kevin Young]

@Anthony Gayden i suggest verifying what your property tax will be in relation to your purchase price.  i'm not sure how taxes are based in your area ... in some regions taxes are based on purchase price ... so using last years amount may be an artificially low amount.

[Ryan Goldfarb]

@Anthony Gayden . In some states, I believe a sale triggers a reassessment of property taxes, so your tax figure may be based upon the purchase price rather than the current assessed value.

3) How does that unit mix jive with what rents in that market? May not be an issue; just something to consider.

4) Just out of curiosity -- any basis for those assumptions on the mortgage? 

5) Given that the owner currently pays water/sewer/trash, any idea of what the process would entail to have that either metered separately or billed back out to tenants (i.e. RUBS)? Or any idea about the legality of such a thing in that jurisdiction? I'd assume that would need to be done gradually as units roll over in order to include it in a lease.