Looking to buy my first rental: an 8 unit apartment

4 Replies

I'm looking at possibly my first purchase, it's from someone I know, and I know the complex is in good shape. The unit is in a great part of town, very popular area. Units have all been renovated about 7 years ago. I'm hoping someone can give me an opinion and help with the numbers.

The apartment cost is $750,000. All 8 units are rented out and have been for quite some time. I also think rent is fairly low so would be easy to fill and could even be increased.

Rent is currently averaging $690 per unit so $5520 per month in rent income.

Monthly expenses = $1445. Insurance, tax, water, electric, garbage.

$7,000 maintenance last year $5,000 of it from a roof repair.

I think for this complex I will need to put down 35%, which I have saved up, but it's pretty much everything I have saved up.

If I put in a 5% vacancy, and $3000 annual maintenance.

That would give me a 13.2IRR.

$1484 monthly cashflow

5.66 cap rate.

I'm new and one of my biggest concerns is mortage rates right now are around 3%. Probably a beginner question but what if it goes up significantly?

First off.. Congrats for having the guts to take a leap into MF.

I'm not sure if Cap Rates in Canada are far off from the US but the only time I've seen such low cap rates be acceptable is on very expensive 3MM+ MF in A+ Class areas where they're bringing in just insane amount of gross rent. 

I personally wouldn't even look at a 5.5 Cap 8 unit. 

Rental rates of $690 a unit have you paying $94,000 for a property bringing in $690. That would be the equivalent here of paying 3x fair market value for a house in the hood. 

I'd proceed with extreme caution if at all. The only way I would remotely consider it is if they were willing to provide seller financing. 

thanks for the reply. I'm not super familiar with cap rates but other single, duplex and triplex cap rates seem to be similar.

@Ron Sharp

Welcome to BP.   How are things out in flatland these days?  Years ago I did some work with SaskTel downtown and there use to be a pretty good Japanese restaurant just down the street (not something I expected in the middle of the prairie).

Looking at what you have posted - and with the caveat that I do not know the market in Regina {property taxes must be low} - my first question is does your figure of $1445/month include: snow removal, lawn care, maintenance reserve (~10% EGR ... which is more like $5500/yr) and property management (say 7-8%)?   If so, it seems remarkable light.  If not, once you incorporate those numbers, you will probably in the range of $2400 - $2700 / month in operating expenses.

According to CMHC, the average vacancy for metropolitan Regina is 7% ... I usually use 8.33 (1 month in twelve) as a benchmark when analysing a property.

Given your numbers, I am also presuming that the tenants pay their own heat/utilities (save water).

This will give you and operating ratio between 43.5% and 49% (which may still be light, but could be correct if tenants are carrying their own utilities)

This will leave you with NOI between $3200 and $2900/mth. From this you need to take your debt service (1500 - 1700/mth) and set-aside a reserve for Emergencies/CAPEx ($300 - $600/mth). This would leave you with a cash flow of $600 - $1400/mth.

Your {M}IRR would be somewhat less than 13%. If you put stock in CAP rates (I don't) you are looking at below 5%.

Additionally, you would require a larger downpayment to bring your Break-Even-Ratio (BER) below 85% and your debt coverage ratio (DCR) over 1.25 (in my experience, commercial lenders like to see 1.4 or better).

While market rent may be greater, remember you are paying for the current performance of the business, not it's potential -  which will require further work and capital from you to achieve.  The current performance level of this business, (~61K/year) does not support the asking price of $750K.   Again, I do not know the local market, but as a business, this one appears to be 25 - 30%+ over priced.

@Roy N.

Thanks for the reply. I did include a $3000/year maintenance in the price. I didn't think about lawn care and snow removal though, good points.

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