Is This 18 Unit A Good Deal?

36 Replies

I am looking at an 18 unit complex. It consists of two buildings that each have 9 units in them. The buildings have an upper level with units and a lower level with units. There are 12 units that consist of 1 bed/1 bath and 6 units that are studio/1 bath. I have attached rent roll that was sent to me as well as expenses. I could purchase the building for $500,000 and there is possible owner financing but I have not gotten into that yet as I try to analyze the deal. A couple expenses that are not on the sheet are a new roof last year for $11,500 in both buildings as well as $4,000 in paint and supplies. The units are older and could use some updating and the building was built in 1964. 

I currently own a single family that is my primary residence and this building would be my first purchase into rental property. I would love to get insight from others on this deal as well as things I need to look for and be aware of. I'm sure there are numbers that I currently do not have that I need to properly analyze this. 

Any guidance and advice is greatly appreciated. Thank you

Hey @TysonLee,

There are a lot of aspects to a deal besides just the numbers, i.e., market analysis, what can the market withstand in rents, is the property value add if so how much can you afford to renovate - what would be the strategy of the renovations, and what is your overall investment strategy (Buy/Flip, buy/hold, BRRRR). I would also like to know what did you get when you ran the numbers, what were your inputs for your analysis?

Few things I noticed right away: 50% of the units are month to month - could lead to high turnover and vacancy. Only $250 in reserves, should have at least $4,500 (250/door, and if the property is older, 1964, you may want to consider more). They are paying 6.35% in PM fees, can you get that same rate? Have you compared?

When I do my analysis, I always use the numbers that the property is currently doing, never what they will do. I only consider rental income: $80,533.57. Expenses automatically to 50%, because assume that you cannot run the property any better than what the current owner is doing, and it being your first property there will probably be some hiccups. Interest rate, I am going to use 5%.

This is my quick analysis:

Rent Income: $80,533.57

Expenses (50%): -$40,266.59

DSYR: -$26,400

Cash Flow: $13,866.59

CoC: 11%

*Note: This did not include closing costs, an increase in the reserves or taxes which I do not believe were on there. 

*An area of possible opportunity, notice in the expenses that the owner is paying utilities.

Hope this helps! 

V/R

@Tyson Lee this is my personal preference, but I'm not a fan of properties that are all 1 beds and studios. I feel that vacancy is always higher with those so I try to look for something with a mix of more bedrooms. The numbers look ok, nothing stellar at $100/door/month.

Thank you for very much Troy. I agree with you on the utilities. That is a question I have because I was told the tenant pays utilities but then I also noticed the $14k in utilities on the expense sheet. So I was not sure if that was water, trash, etc... Seems like a lot but I don't have anything to compare it to. I also need to find out what the taxes are. Right now I'm trying to get an idea of what questions I need to ask and I want to be informed before asking a bunch of dumb questions that maybe I should already know. I appreciate you taking the time to help inform me on some issues. I am also looking to buy and hold this property. 

* What does DSYR stand for? I'm guessing it has to do with the loan payment?

@Tyson Lee Please spend more time learning before you buy anything. A simple good search will answer these type of questions you asked. Listen to 200 BP podcasts and then go buy something like this.

@Caleb Heimsoth Thanks for the reply. I've only listened to about 100 podcasts and read 5 books so I know I have a lot more to learn. This is a deal I came across and was just curious as to what others thought of it. Thank you for the input. 


Originally posted by @Tyson Lee :

Thank you for very much Troy. I agree with you on the utilities. That is a question I have because I was told the tenant pays utilities but then I also noticed the $14k in utilities on the expense sheet. So I was not sure if that was water, trash, etc... Seems like a lot but I don't have anything to compare it to. I also need to find out what the taxes are. Right now I'm trying to get an idea of what questions I need to ask and I want to be informed before asking a bunch of dumb questions that maybe I should already know. I appreciate you taking the time to help inform me on some issues. I am also looking to buy and hold this property. 

* What does DSYR stand for? I'm guessing it has to do with the loan payment?

 Hi Tyson, one thing to consider is to what degree these expenses can be reduced - not saying they are high, as I don't know what they run for a comparable property in your market, but the utilities would be a concern (what that is exactly), taxes are decided by locality/state but get the number obviously from landlord themselves. Also, are the units individually metered for utilities, or how does that work? If they were each paying utilities, I'd assume they were, but just want to clarify. 

Also, I assume that this is an outside property management company? Is it possible to get better rate/costs from them, or are there others in the area who could do a decent job for a lower price? Something to research in my view. Additionally, how long is their contract for, i.e. are you buying the place with a commitment that they will be retained as the property manager for a certain amount of time? If so, how long. You want to find that out as well, because if you can reduce expenses effectively, obviously you've increased your NOI.

Originally posted by @Tyson Lee :

Thank you for very much Troy. I agree with you on the utilities. That is a question I have because I was told the tenant pays utilities but then I also noticed the $14k in utilities on the expense sheet. So I was not sure if that was water, trash, etc... Seems like a lot but I don't have anything to compare it to. I also need to find out what the taxes are. Right now I'm trying to get an idea of what questions I need to ask and I want to be informed before asking a bunch of dumb questions that maybe I should already know. I appreciate you taking the time to help inform me on some issues. I am also looking to buy and hold this property. 

* What does DSYR stand for? I'm guessing it has to do with the loan payment?

 Also, I do agree with the concern others have raised regarding turnover/vacancy. 1 beds and studios often mean single people, students etc, so turnover can be a real issue. Now, you can try to find ways to minimize that (I have a single family property here in Los Angeles for which my agent signed some solid tenants on a 3 year lease, so ti is possible), but it's trickier for apartments like this. 

Originally posted by @Tyson Lee :

@Shiva Bhaskar Thank you. I've written your questions down and honestly didn't think about a contract with property management and the possibility of being stuck with them. 

 Usually the contracts aren't forever (at least in my market), so it's not a deal breaker if you bought with them, and wanted to replace after X months or even a year or more. Still, you'll want to find it. Just my 2 cents, look like you are doing this, but really dig into those expenses and see what could be done, OR what you might do to get higher rents (i.e. do you know contractors? Maybe see if stuff in the area that's more updated rents for more than what this building goes for?) 

I admire your willingness to try for a bigger deal (i.e. more than four units) on the first one, but just keep asking questions and exploring every aspect of the deal as much as possible, to make sure it works for you, and that you've got a handle on things. There are no stupid questions here, and if the broker and seller are not able to give answers to your satisfaction, or the deal has issues, walk away. There will be others, and this is a learning opportunity more than anything else. Best of luck to you. 

@Shiva Bhaskar Thank you for the words of support. I'm just trying to get a handle on all this and no matter how many books I read or podcasts I listen to it's still new to me and out of my comfort zone. I feel like I could easily skip over something that I should not have and it would come back to bite me. I appreciate everyones advice.

There is no contract with the company that is currently managing the building and that could be changed any time. 

The taxes are $6,811 which is higher then what I initially thought. 

The units are not metered separately and the current owner pays the utility bill which is over $14k a year. I have listened to a handful of podcasts where people meter each unit separately to add more value. That is something I'll look into and find out how much that may cost. 

The tenants are also all on a year lease but I'm not sure why some say month to month. 

@Tyson Lee Look into RUBS - A Ratio Utility Billing System allocates the property’s actual utility bill to the residents based on an occupant factor, square footage factor, or a combination of both. Also, if your building can support submetering that would be my #1 recommendation.

@Tyson Lee From one new BP member to another. Asking questions is what this site is for, so please do not hesitate to ask these types of questions. The responses from other folks have already helped me in my current property evaluation. 

One thing that stood out is the discrepancies in rent roll vs what they're telling you. The rent roll (to my knowledge) is supposed to be cold hard facts. If they're not providing that, you may want to get bank statements, or existing contracts to verify what they're saying is true. If their rental agreements indicate that the property owner will pay for certain utilities, then you can at least understand the rent roll a bit more.

P.S. Happy to see a fellow Coloradan!

I have listened to lots of podcasts and read lots of books but haven't done a deal yet. Other than submetering, I'd recommend you ask to see the leases and whether each person has a security deposit that matches their present rent. It doesn't look like that on the sheet. I'm confused by the ones that have significantly more in the "deposits held". You need to see the leases to verify these amts and make sure if you do the deal, you get these. A tenant might say they gave him 2 m security and expect it back from you. One guy looks like no security held. Why? We came close to getting a 6 unit but when we looked into the paperwork, the #'s looked like people were in arrears. Seller wouldn't explain so we backed out. Good luck. Remember, they say the first deal is for learning - not making a killing but not getting killed either.

I've used an Estoppel Agreement when inheriting tenants. It basically asks the tenant what their rent is, what security deposit they have had withheld, the length of their lease, and any known issues with their unit. Then they sign it. We required it as part of the due diligence. You then compare that to what the landlord has provided. This way, if there is a dispute down the line over how much security deposit they should get back, you have the tenants signature.