Potential apartment building deal....How do I make it work and is it worth it.

Buying & Selling Real Estate
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Potential apartment building deal....How do I make it work and is it worth it.

Barima Opong-Owusu
Real Estate Professional · Novi, MI · Member since 2012 · 73 posts · 8 votes

I'm looking into getting my first buy and hold. After looking for multifamily properties a casual conversation with a coworker turned into the potential for me to buy an apartment building from her relative. Here are the details for the buildind and the deal.

It has 6 apartment units and 3 commerical store front properties. All residental and commercial tenants pay for gas and electricity The income on the property is

Commerical Units: $3975/mth

Apartment Units: $4995/mth Monthly Gross: $8970 Yearly Gross:$ 107,640

Expenses (figures were give by the seller):

-Taxes $11,000

-H2O Bills $3600

-Insurance $7800

-Maintenance $6000

Total Expenses: $28,400

The seller is looking to sell the building for $975,000 with $200,000 down and carry the note for 15-20 years. The monthly payment for 15 years breaks down to $5,830 or $69960/year. Leaving $9,280 as cashflow for the year. CAP Rate of approx 8.6%

After looking at the building I can tell there are lots of ways to add value to the apartment units because they haven't been updated for some time. My biggest questions are does this look like a good deal? And if it is, how would I go about getting the down payment at a cheap enough rate to still have decent cashflow. Private Investor, Convential Loan, Partner, what would be my best route at securing that much money for a buy and hold deal and at that point does the deal still make sense?

Thanks for any feedback.

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Giovanni Isaksen
Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes
12y

@Barima Opong-Owusu We usually run maintenance costs at 10% and in older buildings they're often higher so that expense item looks a little light. Also I would want to see what capital repairs have been done recently. One issue that comes up is that as building owners grow tired over the length of their hold deferred maintenance begins to build up. Since the seller is willing right out of the box to finance the purchase I suspect this seller may be getting worn out and may be sitting on some major repairs or replacements they're hoping you don't spot. I would spend the money to have an engineer do a complete inspection and have them include the expected remaining life of all the major systems, roof, HVAC, etc. in their report.

Another area to look closely at is the commercial leases. Are they gross or triple net or somewhere in between? How much time remains on them? Do they have renewal options? Percentage rent? Understanding and negotiating commercial leases is a whole separate body of knowledge to acquire or hire.

Depending on the terms of the commercial leases and the local apartment market I would build in a vacancy factor to the NOI. The commercial spaces once vacant could stay that way for a long time before a replacement tenant is found, builds out their space and begins paying rent. The seller will claim that the rents are the rents but if you were to finance this property with a commercial lender they would underwrite with a vacancy factor and so you should too.

Good hunting-

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  • Indra H.
    Investor · springfield, MA · Member since 2011 · 98 posts · 16 votes
    12y
    Im not experienced enough to give adv. but i would love to read the opinion of the experts
    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    WHY would a seller hand over an almost 1 million asset that is performing to someone with no down payment money or experience??

    It just seems to risky for a seller. The seller wants 200,000 to be hands off and have the loan income stream on top of it.

    If you get a private investor to put 200k down you will have no skin in the game. The investors 200k will be in the first loss position subject to the 80% owner finance. You still need closing costs, due diligence fees, reserves etc.

    The other component even if you find a partner is this is mixed use which is one of the hard assets to manage and liquidate versus a 100% specific asset class. You have to look at your time into the property versus the cash you will see out of it.

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    1Reply
  • Barima Opong-Owusu
    OP
    Real Estate Professional · Novi, MI · Member since 2012 · 73 posts · 8 votes
    12y

    @Joel Because we met through a mutual acquaintance. And I'm sure there are several investors on here that took a risk using leverage to get started or bringing on a partner. I never said I would have zero skin in the game, but there is no way I could do an amount that large without an alternative method.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    12y
    Originally posted by @Barima Opong-Owusu:

    CAP Rate of approx 8.6%

    Thanks for any feedback.

    What is the market cap rate?

    0Reply
  • Giovanni Isaksen
    Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes
    12y

    @Barima Opong-Owusu We usually run maintenance costs at 10% and in older buildings they're often higher so that expense item looks a little light. Also I would want to see what capital repairs have been done recently. One issue that comes up is that as building owners grow tired over the length of their hold deferred maintenance begins to build up. Since the seller is willing right out of the box to finance the purchase I suspect this seller may be getting worn out and may be sitting on some major repairs or replacements they're hoping you don't spot. I would spend the money to have an engineer do a complete inspection and have them include the expected remaining life of all the major systems, roof, HVAC, etc. in their report.

    Another area to look closely at is the commercial leases. Are they gross or triple net or somewhere in between? How much time remains on them? Do they have renewal options? Percentage rent? Understanding and negotiating commercial leases is a whole separate body of knowledge to acquire or hire.

    Depending on the terms of the commercial leases and the local apartment market I would build in a vacancy factor to the NOI. The commercial spaces once vacant could stay that way for a long time before a replacement tenant is found, builds out their space and begins paying rent. The seller will claim that the rents are the rents but if you were to finance this property with a commercial lender they would underwrite with a vacancy factor and so you should too.

    Good hunting-

    3Reply
  • Barima Opong-Owusu
    OP
    Real Estate Professional · Novi, MI · Member since 2012 · 73 posts · 8 votes
    12y

    @Bob Bowling How would I determine the market cap rate on a mixed use building?

    @Giovanni You make some good points. Adding more into the estimated repairs, adding vacancy and property management makes this a less attractive investment unless more upfront improvements are done to increase the income.

    1Reply
  • Rebecca Lebowitz
    Rochester, NY · Member since 2014 · 138 posts · 45 votes
    12y

    It would probably be worth it to bring a trusted contractor through to see what you're looking at for immediate maintenance costs. It's possible you can use that at the negotiation table to reflect a lower purchase price-maybe (apt buildings are often a competitive seller's market). But remember-whatever quote you get, add 10-20% in the "just in case" reserves, and more time than they estimate, because major rehabs almost always go over budget and over schedule-which means vacancy and no rental income coming in.

    Updated units would possibly mean higher rents, but I make a policy to never purchase property based on speculated rent-only on its current performance, and give consideration to potential rent increases.

    1Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    12y
    Originally posted by @Barima Opong-Owusu:
    @Bob Bowling How would I determine the market cap rate on a mixed use building?

    @Giovanni You make some good points. Adding more into the estimated repairs, adding vacancy and property management makes this a less attractive investment unless more upfront improvements are done to increase the income.

    It sounds like your commercial store fronts don't have commercial leases. If they are short term and not dramatically over or under market rents I would just use a GRM on the income compared to similar properties or just sales comps. If the only GRM comps are all residential I would adjust for a probable higher vacancy rate. Loopnet could provide a market cap range and your broker should have some information unless this is not a typical building for the area.

    1Reply
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