BiggerPockets

I'm considering a small apartment complex. It's a 19 unit. 18 one bedroom units, and 1 efficiency. All units have appliances furnished by the landlord.

There are currently 5 vacant units, but that's because they are undergoing rehab. There is a waiting list for people to live in those units once they are done. That's per the property manager/selling broker (he's acting as both currently). The current rental mix is low income/state aid. Only 4 tenants pay their rent in cash...all the others are on aid.

The 18 1 bedrooms rent for $295 per month
The 1 efficiency rents for $225 per month

All units have been rehabbed except for the 5 which are in process. The tenants pay for their own heat, which is electric. There is no natural gas on the site. The landlord pays for the water and sewer.

The roof was replaced with a full tear off within the past 8 years. There is no deferred maintenance. The only outstaind maintenance thing I see is the parking lot. There are some large asphalt holes which need to be filled.

Here are the expenses per year:

2400 - Insurance
7000 - Taxes
600 - House Electricity ($50 / month, high estimate, only 5 lights run off this meter)
500 - Snow removal (not a huge parking lot)
5200 - Property Management - the current PM charges $100 per week
6642 - Maintenance - I allocated 10%, but that seems very high considering everything has been rehabbed
1000 - Dumpster
8500 - Water/Sewer
9963 - Vacancy

I know the rents are low for the area. I even questioned the PM about it and he said the owner wanted to get people in there to help off set his monthly losses (the owner was a HML and his borrowers defaulted and left the place in shambles). There were only three occupied units when the owner took the place back over after the borrowers defaulted. Since it was vacant with no heat, all the vacant units had water breaks. That caused the rehab. So, as he had them rehabbed, he rented them for $295.

I expect to be able to raise the rent to $325 on all the 1 bedrooms, and $250 on the efficiency.

Plus, the owner (the HML) is willing to do an interest only loan on the property at a 10% interest rate. I'm not sure what duration he's considering. He wants 20% down though.

They're asking $200K.

I think my maintenance reserves at 10% of income are pretty high considering the fresh rehabs. There is an opportunity to add coin operated washers and dryers, too.

I'm targetting an offer of ~$160K given the up side. What do you guys see here?

Just thought of a couple more questions.

are there multiple floors?walk up? Inside or outside stairs? If outside,wooden?

Exterior surfaces? brick? painted siding? no paint siding?

Mark,

Here's how I see this deal:

Gross rents (at $325 and $250): $6,100
Operating Expenses: $3,050
NOI: $3,050

Mortgage ($160K, 30 yr, 7%): $1065

Cash Flow: $1,985 or $104 per unit per month (good)

Now, back to reality. I would be concerned about having 19 one-bedroom units all in one building. That's a lot of one-bedroom units and I would CAREFULLY evaluate if demand will support that. Generally, one bedroom, low income apartments are about the bottom of the barrel for rentals. If the demand is really there, then I'd be fine with it, but that's a big IF!

What kind of low income/state aid programs pay the rent? Can you really raise the rent under these programs? What are other similar units with the same type of aid getting for rent? If these units are freshly rehabbed (and presumably therefore nicer than other similar units) and if the rents are being paid by the state or other government assistance, why would the current owner put tenants in so far below market? If the tenants aren't paying the rent, they don't care what the rent is.

In summary, the numbers look good IF you can raise the rents and IF you can get the occupancy rate up. Obviously, you need to do a THOROUGH due diligence to determine the facts.

Good Luck,

Mike

I'm going to rethink my offer price in lieu of what you guys have mentioned.

I don't think there's much competition for this building right now. Plus, by waiting, the rehabs on the outstanding units will be that much closer to complete. One less item for them to not want to do given that my offer will be less than their asking price.

I looked up the purchase price with the register of deeds office and the buyers who defaulted paid $220,000 for it back in 2003. They then refied the place with the HML for $176K. Their profit margins were tight right from the get-go.

232,000? I thought you said they were asking 200k?