I don't think its snobby, just math. With $300 rent, its just about impossible to get $100 in cash flow. If "expenses" are 50%, and all evidence for apartments says they are at least that, that leaves you $150 in NOI. You want $100 and that leaves you $50 for debt service. That will support a $7,500 loan. Even with 25% down, that's $10K a unit.
At $500, you have $150 for debt service, which supports $22.5K a unit.
I think 50% for expenses is more realistic estimate for $500 than $300. With that little rent, anything is a significant dent. Or else you really scrimp and it turns into a slum.
Applying the usual math, I get a value of $3.6M as it sets. If you could get the rents up to $550, it would be worth $7.3M. But don't buy on what could be, buy on what is. If the current owner had the rents higher, it would be worth more. He should fix the problems THEN sell it for a higher price. This will be a huge and expensive effort to add that value.
Are these tenants all on month-to-month? If not, you can't raise their rents until the lease expires. If you raise rents from $375 to $550 all at once your vacancies will skyrocket. You may say, well, they can't move to any of the nearby complexes for that price. True, but they will move somewhere. I daresay if you raise rents from $375 to $400 you'll see some people move out. So, the real question is whether or not there's enough demand to refill the units.
Have you been inside these units and the other complexes? How do they compare? If yours are dumpy, and I'll bet you dollars to donuts they are compared to the others, people will go to the others.
Are you prepared to personally inspect each and every one of the 278 units?
Have you ever ran anything like this?
Do you have $1M available?
If that loans a balloon, how long till it pops? I really think we may see much higher interest rates in a few years. I'd sure want to lock in long term, low rate financing. If rates are 10% when your balloon is due, the economics are much different.
Aug 12 '09, 05:36 AM
