10 unit apartment, is this a good deal?

4 Replies

Happy Sunday everyone. I came across a 10 unit apartment building for sale in a smaller city in Kansas. This area has several factories in the area that support the community. Each unit has 2 bedroom and 1.5 baths. I am considering offering 400,000, it is a bank owned property currently. They are asking 600,000 and it has been vacant during the sale as bank owned property for almost two years. They haven't lowered the price in over a year at this point. There are no records from any of the previous owners as to the prior income on the property. The apartment need the basics, carpet, paint, cleaning and minor repairs as well as replacement of a few ranges. I'm figuring about 50,000 to get the apartments ready for rent. These units are all metered separately. The realtor I'm dealing with has a management company and he said he would charge 10 percent of the rent per unit. Rent has been estimated at 400.00-500.00 per unit and property insurance is estimated at 8700.00 a year. Turns out, part of the building is located at the end of a flood plain which adds an additional 4000.00 a year in insurance totaling the 8700. It is very hard for me to value this apartment because it has no income. I would appreciate any input as to whether this seems like a good deal or am I just spinning my wheels? Thanks so much, Maggie

I'm in Oklahoma so I don't know the area or the conditions at the property but for the projected income and the risks you are taking, I would offer closer to $300k and plan on $100k to get it up and stabilized. 

Don't hesitate to start even lower. I would check comparable sales in the area. I generally shoot for $20k per unit all in to get those gross numbers. 

I focus my investing on low cost, high cash flow properties and you need to make sure you buy them right. Good luck. 

Maggie,

What the bank is asking is not relevant. As a vacant / non-performing / distressed property the question becomes what will it take (time & $) to stabilize and at that point what will it be worth.

If I take the mid-point of your estimated market rents (get independent confirmation of everything!!!), at full occupancy, the property will generate $50K per year ($450 x 10 x 12). With separately metered utilities, the operating costs might be a bit lower then 50% but really need to understand the condition of the building, age of major systems (e.g. Roof, Heating, etc.) and how long before things like appliances / carpeting need to be replaced in all units.

Assuming it generates $50K / y and expenses run 50%, you are left with $25K NOI before replacement reserve. If you are "all in" for $420K ($400K purchase + 10 x $2K per unit) that is 6.5 CAP. That may be acceptable for a California property but I suspect you can do much better then that in small city / Kansas market. There are many major markets in the mid-west where quality properties generate 10% or more so your $400K should generate $40K if not more.

If this was a "Class A" property, with a solid history in a major urban center, perhaps but otherwise - too much money for too little quantity / quality and too much risk as you are far away depending on people you have not done business with before to look out for your best interests (unlikely at best).

Good luck,

Oren

Paul and Oren, Thank you so much for your input. This is exactly what I need. The numbers don't add up at this price point. I think perhaps $200,000 may work much better but the fact that I'm not close to the property does leave my pocketbook and stomach unsettled. I think I'll stick to what I know I can do which is flip properties for now.
Thank you again.
Maggie

Johnathan and Evan, thank you both for your response to my inquiry. I agree that there is just too much missing information to move forward on this purchase. Thank you very much for the input and opening my eyes. This is a learning experience for me and I'm grateful for the help.
Maggie

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