I have an apartment opportunity that I’m carefully considering. This is my very first apartment/commercial property deal and I would greatly appreciate any help with the deal/analysis as I definitely do not want to make critical mistakes with any of it and in trying to decide a price to offer that makes sense with all the variables considered. I’ve also read many forum posts/articles and videos in preparation. The breakdown is as follows:
Commercial Loan Terms: 5.5%, 25 yr amortization with 25% down.
Asking Price: $399,000
Location: Great Midwest downtown area within biking distance to a very large university.
10 units - All 1 bedroom (5 units in each of the two identical 2 story, side by side buildings) and 9 are currently occupied. 10th unit requires reno before being rent ready. It’s currently used for owner’s storage.
Rent Breakdown: 2 x $525, 1 x $450, 2 x $475, 2 x $495, 1 x $500, 1 x $600, (last unit is vacant). Median rent for this area is $600 for 1 bedroom apts. So rents can obviously be raised to market level. There are currently 3 long-term tenants.
Building Info: Great condition 5,440 sq ft on 6,970 sq ft lot, built in 1916, new roofs 2017, new gutters, soffits, and windows on both buildings, one building has a new water heater & boiler, the other has new electrical panels. Both buildings have one set of new coin operated washer/dryers but more can be added to accommodate the amount of tenants, thus increasing laundry revenue. All units have 2 A/C window units each and screened in porches. Separate electric meters for all units. However, gas and water are currently not sub-metered. Current owner pays for water, trash, and gas with general rental proceeds. Here are the other metrics from the broker (that I will definitely verify myself during due diligence) as follows:
|Heating Fuel||Natural Gas||Cooling||Window Unit|
|Cooling Fuel||Electric||Annual Pot. Rent||$53880.00|
|Vacancy Allowance||$2694.00 (5%)||Effect. Annual Rent||$51186.00|
|Annual Laundry Inc.||$1200.00 (Est @ $100/month)||Gross Operating Inc.||$52386.00|
|Net Operating Income||$32155.00||Real Estate Taxes||$3268.00|
|Building Insurance||$3041.00 (Estimated)||Management Services||$5000.00|
|Maintenance||$2694.00 (5%)||Electricity||$1100.00 (Based on LES monthly avg for buildings)|
|Gas||$2328.00 (Based on BHE monthly avg for buildings)||Water/Sewer||$1800.00|
|Trash Service||$1000.00||Total Ann Owner Exp||$16963.00|
Is that turning out to be a 8 cap rate?
@Kevin Roberts Yes, that’s what I was told by the broker as well.
I'm new to the game and maybe others have better advise, but the expenses seem to be dragging your net down. If you could get the elec/gas and water and sewer down to near zero (except for the common areas of course) that would buymp your capitalization rate up several points thereby improving this property valuation. After those expenses are made after buying and paying for those separtions, you could literally flip the property based on better cap and more net.