6-plexes that are working on a monthly loss...should I buy? 5 posts by 3 users

Posted: 07/19/2008 at 08:46AM

I'm looking at 2 6-plexes, 2 buildings that are owned by a couple from out of state. The units are not generating a profit now, mainly because of management and neglect to update/upgrade apartments. It's a good location and I will be able to rent each unit for about $450 a month. The buildings are next to each other but need work done to get back to profitable. Asking price for both units is $400,000.00 which is a little less then market value. I can buy a 6 plex without need of repair for $220,000, but I like the location of the 2 six-plex better. Please tell me... what do you think of this potential deal? would you buy a property working at a loss ??? Please advice... I don't know if I should proceed forward. Thank you for your help and comment in this matter.

Posted: 07/19/2008 at 09:04AM

You are looking to buy for a LITTLE less than market value. This is a situation with a distressed, out-of-state seller, you should be looking to buy for a LOT less than market value. You don’t mention if the seller is offering terms, that could be a large factor in the deal. Being able to increase the value of the building is a plus, but there isn’t enough information. On the surface it doesn’t look like a great deal. How much work is needed?

8)

Posted: 07/19/2008 at 09:25PM

With 12 units you're likely to come in right about the 50% rule of thumb. I know there are folks here and in that thread that disagree, but I've seen this rule of thumb in several other places for multi-families.

If you pay the $370,000, you're paying $30,833/unit. It works out like this:

Rent $450
Expenses $225
NOI $225
Payment $216 (7.5%, 30 year)
Cash flow $9

At least its not losing money, though it will be with all those vacancies. Expenses on the vacant units are probably something like $200/unit, you're still paying out $216 and you're not getting anything. At that price, this is a bad deal.

So, what could you pay. If you assume normal vacancies (not a good assumption, but here goes), then the vacancy is included in the 50%. Lets also assume you'd like $100/month/unit in cash flow.

NOI $225 (from above)
Profit $100
left for payment $125
max price $17,877/unit
or $214,526 for the property.

But the vacancy rate is outrageous. So, lets account for that. Lets assume 10% of that 50% is vacancy, so we'll bump the expense ratio to 84% to cover the excess vacancy.

Rent $450
Expenses $378
NOI $72
Profit $100
left for payment -$28
Uh oh. You can't buy it cheap enough.

So, I think the $215,000 number above (rounded) is what its worth in good shape, and with reasonable vacancies (5-10%). Subtract off the fixup expense, and the lost rent for the time it will take to get the units rented up. With the work, lets call that six months x four units (one vacancy would be reasonable, IMHO, if you have all 12 rented you'll either be underpricing the rent or very lucky.) That's $10,800, call it $11K. So, knock $46K off the $215K to get $169,000. That's what I think its worth.

Forget about the down payment for evaluating the deal. You're money has other places you can get it to work. If you throw a huge down payment in, like $200K, and it looks like this is generating nice cash flow ($14,000/year), you're really just getting a return on your cash, and not from the property. $14K/year on $200K is a 7% return. Not awful, but not good enough, IMHO, for the hassles and risk for being a landlord.