Could any pros help me evaluate this multi deal

Question

36 Unit complex built in 1975, 500 mo. avg. rent,tenant paid utilities, 97% occ., long term tenants 4-6 yrs, my home area so I could hands on manage. He is asking 875k and I am thinking 750-800k. He works offshore and cant hands on manage, plus he has to take care of elderly parents so he says he has no time when home :idea: 
Thanks 
Jon

Uwe S. · Answer

Congratz jon :).

-Uwe

Jon Rood · Answer

Well, I know its been awhile. I got very busy with my other business and I was told the property had sold for the asking price so I crossed it off the list. I was surfing loopnet the other night and noticed the property back on the market. They had two deals for the asking price, but the buyers failed to fund the deal. I confirmed this with the local title company (small town). I offered $775,000.00 all cash deal and just got word they accepted. They just completed exterior paint, and have a contractor lined up to put on a new roof. All included. All that is left is a complete inspection from a licensed inspector (my father in law) and if all is well, I will be in the game in a week or so!!! I'm very excited. :D

Nick Johnson · Answer

I know that it has only been a few days, but please keep us posted on how this deal develops. Thanks!

Jon Rood · Answer

Gentleman,
Thanks you for taking the time to evaluate this deal. I am going to ask for financials, review, and possibly make an offer :D I pray that God blesses you guys with amazing deals for taking time to help out the newbies on this site. I have had many mentors in my other business, and there is nothing like having someone grab you and say slow down when you need to hear it. I will keep you guys posted on further developments.
Thanks Again
Jon

Jon Holdman · Answer

If you apply a simple analysis to an $800K purchase price, this looks good:

Total gross rent: $18,000
Expenses $9,000 (50% rule)
NOI: $9,000
Payment: $5,322 (7%, 30 years)
Cash flow: $3,578
Cash flow per unit: $102

A more realistic analysis would consider a down payment is going to be required, and the terms won't be as good as above.  So, I'll assume 30% down, 8% and 20 year amortization, though probably with a 3-5 year balloon

Payment: $4,684 (8%, 20 years, $560K)
Cash flow: $4,316
Cash flow per unit: $120
Cash on cash return: 21.6%

Good return, IMHO.

Personally, I don't put much stock into "cap rates for the area".  I see properties trade hands around here at prices that leave me scratching my head.  I don't see how the buyer can possibly make money.  Run this example with a price of $1.3M, and I get a 4.3% cap rate and a $390K (plus closing costs) investment.  I have a feeling you could come very close to that if you had a chat with a local bank president about buying a $400K CD.  And CD's never need new roofs.

Since you say occupancy is 97%, it appears there's good demand.  With occupancy that high, the rents are probably on the low side.

You would want to do a thorough inspection to determine how much work is needed.  And that might affect the price.

If the owner was willing to carry some or all of the note, perhaps at better terms, the deal would be that much more attractive.  You should find out if the current loan is assumable.  That may be an option if the terms are attractive.  Commercial loans are often assumable, for a fee.

Peter Giardini · Answer

Lots of questions...
                    
                    What is the capitalization rate for your area, complex unit mix, all one building or multiple buildings, amount of differed maintenance, actual expenses (and then your expenses for managing the building your way), do you have the a 20% to 25% down payment, is he willing to hold a second... if so how much?
                    
                    With all of that being said, and all other things being equal this property could have a value of pushing $1.3 Million.
                    
                    If this were the case, then the $875K asking price would be a good deal.
                    
                    If this deal crossed my desk I would be all over it as it looks like it has the potential to be a winner.
          
          One other item... do you have an existing relationship with a lender?  If not you should start shopping around.
                    
                    I am sure others will have additional valuable input.