First Potential Deal

[Edwin Brown]

Long time single family investor looking at my first commercial deal. Tell me your opinions.

110 unit complex taken back by local bank. The area is "B" class. Bank is willing to take back purchase price as financing at 1.8 million and the property needs about 500k in additional renovations to get all units up and running.
730,000 gross rents

-73,000 vacancy/collections
-20,000 insurance
-50,000 taxes
-40,000 management
-60,000 utilities
-90,000 repairs, maintenance capital expenses
400,000 NOI

basically a 10 cap property so probably worth 4 million.

Looks to me like we can be in a 4 million property for 2.3 million with 500k out of pocket. Is this a standard deal, bad or good?

[Don Konipol]

Great deal IF your assumed numbers are correct AND no external obsolence such as declining area, next door to slaughter house, etc!

The main things to watch out for are

(1) Assumed vacancy and rental rates - just because average vacancy for the area is 10% does not mean any particular property vacancy will be 10%. Same with average rent rates. Exact location, proximity to competition, local neighborhood etc can change vacancy rates and rent rates dramatically. If the subject property has negative attributes, it may be impossible to maintain a high enough occupancy rate at a high enough rent to make any profit, or even service debt. The property went into foreclosure for a reason. The excuse of bad management is convenient, but not neccessarily the whole truth.

(2) - Assumed expenses may be grossly understated. Many additional costly services, such as on site security, additional parking, shuttle service, maintenance of costly landscaping, marriage counseling, hiring of better and more costly management, etc. might be needed to raise occupancy levels. Tenants in all but the least desirable properties are expecting more and better "life experience" when considering rental properties. Although you may think you are competing only against other "B" properties, potential tenants are considering spending more on rent to live in an amenity rich "A" property and spending less on rent to live in a more basic "C" property, as well as renting individual houses, either as solo or shared, and or moving in with relatives.