BiggerPockets

This property is valued at $46MM, according to the tax assessor.

Can someone tell me, based on these numbers, what is the MAX that should be paid for this property?

The buyer must assume a Freddie Mac loan ($19.4MM, 6.4% rate) that has a payment of about $120,000.

I don't see how anyone can assume that loan, and pay anything more than $5M on top of that to the seller.

Am I right or wrong? Here are the numbers:

I fixed the image and activated the link, since it is impossible to make out any details on a thumbnail.

^ Okay, that makes more sense.

Well here's the deal....this is a 246 unit complex for sale.

Net Rental Income: $4,100,000
NOI: $2,200,000

There is a $200,000 management company fee factored into these expenses. The NOI without management would be $2,400,000. If I can find financing to purchase this property, I want to eliminate the management company, but I don't mind using them for the first year if it's necessary.

The buyer must assume a Freddie Mac loan which is currently financing the property. This loan is at $19.4MM with a rate of 6.4%. The payment on this loan is $121,000/month (103k is interest, 18k is principal).

Payments toward this loan will equal $1,460,000

Like I said, the NOI will be $2.2MM ($2.4MM after I get rid of management).

I want to keep the debt service at $2,000,000 yearly.

So that's gives me $540,000 yearly funds towards paying a 2nd. This allows me a $45,000 payment on this loan. The 2nd is a private loan I am looking for that will go towards the downpayment.

A loan of $7,000,000 at 6.5% will give me a payment of $45,000 (38k interest, 7k principal).

Is this do-able? Is it realistic for me to find an investor who will give me that loan of $7,000,000 at 6.5%?

With that $7,000,000 loan, I would save $500,000 for reserves. So $6.5 million would go towards purchase price, so pretty much I'd be offering $26million on the place.

So here's the summary:

Gross rental income: $4,100,000
NOI (with management): $2,200,000

Debt Service 1: $121,000
Debt Service 2: $45,000

Total Debt Service: $2,000,000

Net Income: $200,000

Net Income after eliminating management company: $400,000

Also, I'm not factoring in the $25,000 (between the two loans) that will be going to principal each month. So essentially, we can add another $300k to yearly income.

I will also try to cut down a lot of these expenses. There are 5 handy-men that work on-site, and there is a $4500 monthly expense for landscaping. I'd rather have one of the 5 full-time handy-men work on landscaping daily, and eliminate the $4500 monthly fee there. Also, the assessed value of $46 million is high, so I would try to get the assessor to lower the yearly taxes of $511,000.

I understand that there are probably better deals out there. However, I feel very comfortable with this one for two reasons:

1) My cousin has been a leasing consultant at this property for a year, so he has a good idea of the daily operations.

2) This is in the city that I've lived in for the past 17 years. I'd rather buy here instead of out-of-state.

Is this a good deal?
Do the numbers make sense?
Is $26MM a fair price? Should I bid lower? Higher?

What formula can I use to determine the value of this property, based on the NOI of $2.2MM?

All input is appreciated.

Nevermind, I got my answer...there was an ownership change.

The rents are going down and the vacancies are going up, at least according to the very limited data in the report. There were no Capital Expenses/Reserves shown for 2008 or so far in 2009.

Here is how I see this deal based on the numbers you posted:

Gross rents: $4,100,000
NOI: $2,200,000
Debt: $2,000,000

Net Income: $200,000

Less Capital Expenses/Reserves (5% of gross rents): $205,000

Real Cash Flow: $5,000 LOSS (OUCH!)

Now, if you get rid of the management company, you could probably save some money. I would suggest that you will need two EXPERIENCED, full time property managers to run the property. In the PRC (People's Republic of California), I'd guess that's going to cost you at least $100,000. So, you might be able to save/make $100,000 there IF YOU CAN FIND EXPERIENCED AND COMPETENT MANAGERS. If even one of the managers is a bozo, it could COST YOU A LOT OF MONEY!!!

The debt going to principal payment is NOT INCOME! Try to take that to McDonalds and see what you get - NADA!

As far as the maintenance goes, I think that you could run the place with 2 experienced, full time maintenance personnel (and that would include the landscaping). You didn't include the salary for the 5 handymen, so I can't tell you what the savings is here. However, with the pro-forma payroll showing $409K, I think you could save another $100K here if you had the right people.

If you could save $100K on management and $100K on the maintenance payroll (which I believe is certainly possible) and if you could save another $100K through a lowering of other expenses and/or debt, then I think this could be a good deal.

In my estimation, the expenses for this property are about 5% to 6% too high. It would take an well run operation to fix it, but I certainly believe that it could be done.

I assume that you have some serious experience in the rental property business (or at least in some business).

Good Luck,

Mike

However, based on these numbers....can they realistically expect ANYTHING except a SIGNIFICANT loss? I mean....they paid $37 million, and only an dummy will pay $27 million....so they will lose a minimum of $10 million.

Can anybody figure out why they would be selling this? Are they just trying to cut their losses and sell this property before they lose more money?

This is being sold on the greater fool theory - that there is always a greater fool than the current owner who will buy the property. In all fairness to the current owner, I have never seen one of these things that will actually cash flow. They get dazzled with a bunch of mumbo jumbo and slight of hand accounting and become convinced that the property actually makes money (like considering principal paydown and appreciation as income). Yes, those things are good and have the potential to be money in your pocket down the road, but only if you can afford to operate the property until that time.

Good Luck,

Mike

This smells of a bad deal I would not even go the extra lengths of doing a syndication I would just pass on this property and move on to the next one that will CASH FLOW.

Anyway, about your other points....I understand that this is no simple task. Raising 4 million won't be easy...but I have an idea of a few people I want to talk to. Smart investors know that right now is a good time to buy real estate....so hopefully I can find right person(s).

And no, I have never done a deal like this before. But there's a first time for everything....go big or go home.

Jon, can you expand a little bit on the PPPs you mentioned? I'm not very familiar with private placements...can you shed some light?

Also, I'm thinking that one of the reasons the seller isn't making money from this property right now is because of the property taxes. They haven't paid the past two rounds of taxes...so one year behind means that they're 510k delinquent. I think that this 510k (based on the $46MM assessment) is going to prevent them from making any significant profits. The new buyer will be buying at about half of 46k (unless they find a dummy), so those taxes will be significantly reduced.

They have a loan of $19.4MM right now....but I might be making DOUBLE what they are making, simply because my taxes will be cut in half. They might be walking away with 250k for the year, but a new buyer could walk away with 500k just because they will save 250k in taxes.

Hello Mike,

An investment this large concentrated
in one area is about the ECON and
that area.

I would be very very familar with the
area, state (CA is BK) and the like

Also you are betting on the entire ECON with this one.

I would be very very careful here

Also apartments as you know if you
own any all are about deferred maintenance AND Liabilty and
also its insurance

Go very careful on the above also
I have friends that luckily sold thier
apartments 2-3 years ago for this
very reason and bought SFRs
because they just are better to
deal with in many many ways.

I would also inspect that apartment
to the gills and meet with the
repair men to see what they say
but really most repair men getting
paid $15 an hour or now less do not
know much about the condition of the
property YOU DO so I hope you have
done ALOT of repairs GO LOOK
and completely INSPECT THE
apartments EVERYTHING and I mean
EVERYTHING to the T and to the MAX

I am a 30 year RE veteran and sold
much of my RE 2-3 Years ago.

SKI