Extra eyes needed on a 46 unit apartment deal I am analyzing

Fort Worth, Texas
Multi-Family and Apartment Investing
4yFollow

Extra eyes needed on a 46 unit apartment deal I am analyzing

Emmanuel N Okafor
Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes

Hello,

I am trying to buy my first apartment complex. I currently own 11 single family rental properties. I did an interest-only cash out refinance last month and pulled out $914,000 that I want to use to buy an apartment. My single family portfolio cash flowed $80k a year before my refinance and it now cash flows about $40k. My goal is to get a combined cash flow of at least $200k and in 5 years, I want to payoff my interest only loan and own my single family properties out right. 

I would appreciate any feedback on this deal. If you see any red flags or opportunities I missed. I also want to know if my offer is too high or low. 

My thinking

I view this as a value add investment opportunity. Based on T12 data and other documents I viewed I recalculated the apartment value. I used NOI of 175,646 and the DFW area value add cap rate of 5.5% to get a value of $3,193,663. Since they have a low reserve for security deposit, high late payment rates and no metered utility, electricity or gas, I offered $3,000,000. I reasoned the $193,663 can be used as reserve for metering the property and other needed non-recurring replacements. Is my offer too low? I would like to get the units metered but don't know how much that will cost. Ideally an immediate win for me would be to cut expenses down from the present 65.5% to 50% with minimal expense which will add a million to the valuation and allow me to do a refinance in a few years to pull out equity to buy another apartment. 

Details about deal

  • 1970 46 unit apartment in the DFW area.
  • 26 units are 1 bedrm, 1bathroom | rent $990 |security deposit $100
  • 20 units are 2bedrm, 1.5bathrm | rent $1230 |security deposit $200
  • Asking price is $5,200,000 | NOI=$217k | Cap Rate=4.17

Revenues

  • Total Revenue=$567,776 | Net rental revenue=$449,923
  • rental losses=$117853
  • Other revenues (application fee, pet fees, deposit forfeitures) =$59,766
  • Total Revenue=$509,689

Operating Expenses

  • Total personnel expenses=$88,603
  • Total property administrative expenses=$28,277
  • Total Leasing expenses=$4907
  • Total utility expenses=$36,991
  • Total service expenses=$10,953
  • Total cleaning and decorating=$16,305
  • Total repairs and maintenance=$14,468
  • Total property taxes=$78,731
  • Total Hazard insurance=$27,107
  • Total operating expense=$334,042 (65.5%)
  • Net Operating Income=$175,646
  • Total non-recurring replacements=$25,086
  • Available for debt service=$25086
13Reply
25 views

Most Popular Reply

Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
4y

$3.0 million or $65k per unit for market rent of $1,100 per month is a nonstarter. How they run the property is not relevant to how you will run the property. They could have $0 NOI and have a property value greater than $0. The market value is not determined by the seller...it's determined by the buyers. Run your numbers, not theirs, to determine the strike price that meets your investment criteria.

13Reply
See this reply in the discussion

31 Replies

Jump to latestLatest
  • Comelia Hinkley
    Realtor · TX · Member since 2022 · 10 posts · 4 votes
    4y

    I’m fairly new to investing. I’m learning investing side but I am realtor. Not sure what area of DFW the apartment in but the rent could be a bit low. Also the security deposits often match the rent. Let me know if I could help in any way. Even just seeing what rents run in the area you are looking at. 

    1Reply
  • Emmanuel N Okafor
    OP
    Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes
    4y

    @Comelia Hinkley,

    Thanks for your response. I also thought the rent was too low but I haven't seen the complex yet so it may be a reflection of the present condition. I forgot to mention the security deposit aspect. I thought it was unusual to only ask for $100 for the one bedrm that rents for $990 and $200 for the 2 bedrm and 1.5 bathrm that rents for $1230. In my single family properties, security deposit is one month's rent. 

    The apartment is in the 76118 area code. If you can let me know what 1 and 2 bedrms rent in the area, I would greatly appreciate it. 

    1Reply
  • Carlton B.
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 281 posts · 133 votes
    4y

    Like you I'm looking to scale using multi family apartment investing. During my research I stumbled upon @Charles Seaman who does a webinar where he analyzes apartment deals. There is a deal analyzer that he uses (a spreadsheet on steroids) that would be great for this deals. 

    1Reply
  • Charles Seaman
    Apartment Syndicator · Charleston, SC · Member since 2017 · 519 posts · 631 votes
    4y

    @Carlton B. Thanks for the kind words.  I use the Syndicated Deal Analyzer, which can be found at the link below.

    https://themichaelblank.com/sy...

    @Emmanuel N Okafor This tool is specifically designed for syndication.  It sounds like you're using your own money, so one of the BiggerPockets calculators will likely suffice.  I don't look at too many deals in the DFW market, but a cap rate of 5.5% seems really high.  Now it's possible the market might get there as interest rates continue to rise, but it's likely way above where the market currently is.

    2Reply
  • Comelia Hinkley
    Realtor · TX · Member since 2022 · 10 posts · 4 votes
    4y
    Quote from @Emmanuel N Okafor:

    @Comelia Hinkley,

    Thanks for your response. I also thought the rent was too low but I haven't seen the complex yet so it may be a reflection of the present condition. I forgot to mention the security deposit aspect. I thought it was unusual to only ask for $100 for the one bedrm that rents for $990 and $200 for the 2 bedrm and 1.5 bathrm that rents for $1230. In my single family properties, security deposit is one month's rent. 

    The apartment is in the 76118 area code. If you can let me know what 1 and 2 bedrms rent in the area, I would greatly appreciate it. 


     

    I have found no 1 bedroom that has been rented in the area for the last year. I found 2 bedrooms with 1.5 bathrooms from 895-1400. 1400 was a townhome 2 story. There were apartments. One rented for 895 the other for 1050 yet same apartments. The unit that was 895 had granite countertops and vinyl flooring but didn't look in great condition otherwise. The higher price didn't show pictures. I've seen duplexes that were between 1200-and 1400. Those had granite countertop and vinyl flooring. There is a dart station in the area that can make it good for people to commute to different areas. Hope this helps. 

    1Reply
  • Lucia Rushton
    Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
    4y

    @Emmanuel N Okafor. Strong rental market area. Are you going to self manage? Depending on the previous management style the deposits might not match the current rents. And the current rents might not be market.

    They probably just put a sign in the front. It’s a C class asset right ? Has someone walked the property for you ?

    1Reply
  • Emmanuel N Okafor
    OP
    Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes
    4y

    @Charles Seaman

    I looked up cap rate for the zip code and it says 5.5% for value add multifamily. The broker responded to me a few hours ago and acknowledged the cap rate for the area to be 5.25%. I calculated the value of the property by diving the NOI by the cap rate. Based on that calculation, the apartment is not worth more than $3,300,000 but the broker says the offer needs to be at least $4.5 million. He doesn't want to give me a tour until I submit an offer that is close to their asking price of $5.2 million.

    3Reply
  • Charles Seaman
    Apartment Syndicator · Charleston, SC · Member since 2017 · 519 posts · 631 votes
    4y

    @Emmanuel N Okafor If that's what the cap rate for the area is, then it sounds like your offer was reasonable based on your explanation.  Did the broker mention if that was the cap rate before the value add or after it was implemented?

    0Reply
  • Emmanuel N Okafor
    OP
    Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes
    4y

    @Lucia Rushton

    I would like to use a property management company at first while I evaluate the practicality of managing it myself. I currently self-manage 11 single family rental portfolio. Yes, it's a C class asset. The broker doesn't want to give me a tour until my offer is close enough to $5.2 million. I hope he will change his mind...

    0Reply
  • Emmanuel N Okafor
    OP
    Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes
    4y

    @Charles Seaman

    "Cap Rates in DFW for C Class deals is closer to5%. 6% Cap Rate Stabilized but 5%-5.25% going in cap rate"

    The quoted text was lifted from his email to me. 

    0Reply
  • Emmanuel N Okafor
    OP
    Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes
    4y

    @Comelia Hinkley

    Thanks, I will drive the area this coming weekend to get a better feel for it. The 2bedrm 1.5bathrm is a townhouse style two levels so there may be room to raise rent a little bit. 

    1Reply
  • Emmanuel N Okafor
    OP
    Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes
    4y

    @Carlton B.

    Thanks for suggesting a deal analyzer. I have never used one before but will look into it. 

    1Reply
  • Travis Oneill
    Member since 2020 · 26 posts · 6 votes
    4y

    @Emmanuel N Okafor. I am a new investor and was wondering if I can seek some mentorship through you if possible. I sent you a private message. Thanks!

    0Reply
  • Myles Johnson
    Rental Property Investor · Denver, CO · Member since 2018 · 14 posts · 19 votes
    4y

    @Emmanuel N Okafor

    I love the deal as you laid it out. Especially, having expenses at 65%. You can obviously lower that percentage. I’m curious why you believe that they would accept $2M under asking price? What are your thoughts?

    2Reply
  • Emmanuel N Okafor
    OP
    Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes
    4y

    @Myles Johnson

    I don't have any expectations. My offer was based on the actual value of the property based on the Net operating income they provided in the T12 and the current cap rate for value-add multifamily properties in the DFW area. In my analysis, there is a lot of risks and work to be done and I am unwilling to pay them for values they have not added to the property.

    What I am hoping to gain from here is an acceptable amount I can come up in my offer without assuming too much of the risk. 

    3Reply
  • Robert Duncan
    Developer · CT · Member since 2014 · 24 posts · 56 votes
    4y

    @Emmanuel N Okafor

    Your offer seems fair based on the information given. It may be the only offer, considering you haven't walked the property yet. Good luck!

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    4y

    $3.0 million or $65k per unit for market rent of $1,100 per month is a nonstarter. How they run the property is not relevant to how you will run the property. They could have $0 NOI and have a property value greater than $0. The market value is not determined by the seller...it's determined by the buyers. Run your numbers, not theirs, to determine the strike price that meets your investment criteria.

    13Reply
  • John Brodeur
    Investor · Philadelphia Metro · Member since 2019 · 44 posts · 75 votes
    4y

    @Emmanuel N Okafor, First I want to say congratulations on building a tremendous portfolio and significant cash flow in single family rentals! You are clearly doing a ton of great things already and I aspire to grow my portfolio and cash flow to be in a position that you are some day.

    I don't have the level of experience that other's on the forum have in multi-families, so take what I say with a grain of salt, and of course due your own due diligence. I am however under contract with a partner on a 11 unit value-add opportunity myself so I am sharing how we have approached some of the analysis. 

    Are you purchasing this property based on the T12 as a stabilized property or based on the value add opportunity? If you looking to buy the property for the value add opportunity I think the best way to analyze the deal is to look not at what cap rate you are buying it for now, but what the value should be post rehab/ or repositioning.

    As I have read and gleamed from others the reason why cap rates for value add opportunities are lower than stabilized opportunities is because investors are willing to pay more up front, because based on the value add they are actually getting a better return post the value add being completed. 

    The price that you are willing to pay should be commensurate with how much value add there is, and what the risks are pertaining to the execution of that value add. You mention being able to cut expenses to 50%, sub-meter units, potentially raise rents. I think understanding the feasibility, cost, timeline, and business plan, as well as exit strategy will help lead you to what price you are willing to pay for the value add. 

    An example: Let's say you've analyzed the T12 and you are highly confident that reducing expenses is able to be done (let's say because you already have quotes from your vendors (PM, landscaping, cleaning crews etc) that will get you where you need to be easily and quickly. As you would be able to add $1M to the value of the property with little work you might be willing to pay up on the purchase price for the ability to gain some of that higher valuation. The more you pay up for the property of course the less of that higher valuation you get to keep. Maybe one investor is willing to pay $500K more for the ability to easily add $1M, but another is only willing to pay $200k, and still another is willing to pay $800k. It will come down to what is your strategy, and how confident are you in being able to execute against that strategy to hit the value add.

    All this being said, you of course want to also look at your exit CAP rate, and in a rising interest rate environment it's entirely possible that CAP rates will expand again so if you are paying up for the ability to execute value add I would also stress test the post value-add valuation with an expansion of CAP rates to ensure that your value-add opportunity isn't eaten up by a decrease in overall valuations.

    3Reply
  • Tim Hall
    Flipper/Rehabber · Tallahassee, FL · Member since 2014 · 462 posts · 237 votes
    4y

    @Emmanuel N Okafor hi there, I just wanted to add my 2 cents and it’s probably worth just that. Keep your head. I look at numbers today. Can the property sustain itself now for what they are asking for. If the answer is yes then there is a deal to be struck but if the answer is no then there is no deal. Indulge me for a minute. If I came to you with a single family house and said Emmanuel, I’ve got a house that I need to sell. The house is $110k and I have a tenant in there for $900 a month but if you put in $20k you’ll be able to raise the rents by $200 a month would you do that deal? For me it’s a hard no. It sounds like a job with little rewards. Stick to your guns and follow up with them in 3 months. Good luck mate!

    0Reply
  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    4y

    @Emmanuel N Okafor when I analyze apartments, I focus a lot on the utility setup. I buy here in the Chicago market, so obviously there are differences. This is a 1970's complex, so is there a boiler for heat? What kind of AC do they have? Who pays to heat the hot water? Is there a central tank or does each unit have its own? In my market, I see broker pro formas all the time that have a 35% expense ratio which is literally impossible on a vintage building with a single boiler/hot water tank. If this building is not sub metered, then that could be your play. Or you could separate utilities by adding new hvac, plumbing, etc. This all costs... a lot. 

    After I have finished that part, I move to the deferred maintenance aspect of the deal. Are there roofs, porches, mechanicals, sidewalks, siding, parking lots, or other common areas that need a facelift? What will it take to do this? This is the part where a lot of newbie investors get destroyed. You are focused on whether the deal is a 4 cap or a 5 cap, but you can miss the fact that there is a looming CapEx event that needs to be factored into your business plan.

    Last, I look at the business plan to see if there is a way to increase the NOI. If you are buying a 4 cap (and not a 1 cap or something worse) then there should be a plan to drive rents. Typically, this is through renovations which add value for tenants which allows you to charge more. How much upside is there on the deal, and how much will it cost to get there?

    Your offer price probably needs to be something "realistic" for the seller. If the broker is good, they will have guided you there at this point in some way, and the list price or whisper price should have told you where you need to be to get the deal if it makes sense. 

    9Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    4y

    @Emmanuel N Okafor it doesn't seem like you have a motivated seller and the market conditions currently don't support offers ~38% under ask. Most assets like this are selling at or above ask. I'd send over an LOI at the max amount you'd be willing to pay (sounds like a little over $3M) and then move on. It's highly unlikely that the seller will come to the table when you're that far apart to begin with, but if they don't get any other offers you never know, maybe they'll realize that their asking price is greedy and they'll meet you in the middle somewhere. Seems like a long shot though, I wouldn't spend too much time on it. Good luck!

    7Reply
  • Emmanuel N Okafor
    OP
    Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes
    4y
    Quote from @John Brodeur:

    @Emmanuel N Okafor, First I want to say congratulations on building a tremendous portfolio and significant cash flow in single family rentals! You are clearly doing a ton of great things already and I aspire to grow my portfolio and cash flow to be in a position that you are some day.

    I don't have the level of experience that other's on the forum have in multi-families, so take what I say with a grain of salt, and of course due your own due diligence. I am however under contract with a partner on a 11 unit value-add opportunity myself so I am sharing how we have approached some of the analysis. 

    Are you purchasing this property based on the T12 as a stabilized property or based on the value add opportunity? If you looking to buy the property for the value add opportunity I think the best way to analyze the deal is to look not at what cap rate you are buying it for now, but what the value should be post rehab/ or repositioning.

    As I have read and gleamed from others the reason why cap rates for value add opportunities are lower than stabilized opportunities is because investors are willing to pay more up front, because based on the value add they are actually getting a better return post the value add being completed. 

    The price that you are willing to pay should be commensurate with how much value add there is, and what the risks are pertaining to the execution of that value add. You mention being able to cut expenses to 50%, sub-meter units, potentially raise rents. I think understanding the feasibility, cost, timeline, and business plan, as well as exit strategy will help lead you to what price you are willing to pay for the value add. 

    An example: Let's say you've analyzed the T12 and you are highly confident that reducing expenses is able to be done (let's say because you already have quotes from your vendors (PM, landscaping, cleaning crews etc) that will get you where you need to be easily and quickly. As you would be able to add $1M to the value of the property with little work you might be willing to pay up on the purchase price for the ability to gain some of that higher valuation. The more you pay up for the property of course the less of that higher valuation you get to keep. Maybe one investor is willing to pay $500K more for the ability to easily add $1M, but another is only willing to pay $200k, and still another is willing to pay $800k. It will come down to what is your strategy, and how confident are you in being able to execute against that strategy to hit the value add.

    All this being said, you of course want to also look at your exit CAP rate, and in a rising interest rate environment it's entirely possible that CAP rates will expand again so if you are paying up for the ability to execute value add I would also stress test the post value-add valuation with an expansion of CAP rates to ensure that your value-add opportunity isn't eaten up by a decrease in overall valuations.


    Thanks for the insight. The big problem I have is I haven't put together a team yet for multifamily. The property is not being sold as a value add investment. It currently has close to 100% occupancy. I see the value add opportunity to reduce cost but I don't know how much it will cost to execute so I don't know if it's a doable opportunity. I can certainly try to run the apartment more efficiently but all those are what ifs. The reality is that the apartment is old, 1970s so I will end up spending more money in maintenance. I only used the cap rate to figure out it's actual value. I am a cash flow guy from my experience in single family properties. When I do the cash on cash return calculation it's 2% if I pay the asking price and 3% if I pay $3.5million. I think the asking price is unreasonable. Perhaps I am being too careful as a newbie in multifamily, I don't know. The max I am willing to pay for this property is $3.5million. 

    0Reply
  • John Brodeur
    Investor · Philadelphia Metro · Member since 2019 · 44 posts · 75 votes
    4y

    @Emmanuel N Okafor

    Not saying you are being too careful, I think based on the fact that you don't have a team together, and a more detailed plan on how to execute a value add project for the property with a high confidence you are appropriately going in on what the current as is value. I think if you already had the teams in place, and had a high confidence plan in place you might be able to push the dollar amount up. 

    0Reply
  • Emmanuel N Okafor
    OP
    Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes
    4y

    @John Warren

    Thanks for the post, it is very helpful. I listen to a lot of Bigger Pockets podcast on multifamily. I was trying to go for the sub meter play but the broker isn't really being helpful. He did tell me that my bid was too low that it needs to be around $4.5 million to be taken seriously enough to get a tour of the apartment. The building is not sub metered. So should I just give him the number he is looking for so I can get an opportunity to see what type of value add opportunities are present? How do you evaluate the feasibility of sub metering, do you bring experts with you to look at it before you make an offer?

    One of my concerns is deferred maintenance which is why I want a tour of the apartment. In the T12 I looked at, $138,000 was spent on non-recurring replacements. I noticed that plumbing was 23% of that cost and 26% of recurring maintenance. I own 3 townhouses that were built in 1973 and they have corroded cast iron pipes that caused frequent plumbing issues. I had the cast iron pipes replaced with PVC pipes but it wasn't a cheap thing to do. I am the only investor in the area that did that. My tenants don't ever call plumbers but I see plumbing vans at other units whenever I stop by the townhome complex.

    What do you mean by you look at the business plan? Are you saying you come up with a business plan to increase the NOI? How do you go about estimating costs of repairs? Is that mostly from experience or do you have contractors tour the apartment with you and then they submit quotes for repairs?

    I understand that I need to give a realistic offer for the seller but what if their asking price is too high? Besides the value based on cap rate and NOI being only $3million, the cash on cash return is terrible. If I calculate based on their asking price, it comes out to 2% ($175,646 - $148,019)/$1.3million=2%. I am aware that a well executed value add and strategies to improve efficiency will change the numbers but should you be the person enjoying that instead of giving a lot of it away at the front end. How do you navigate negotiating on potential efficiencies vs actual value?

    0Reply
  • Emmanuel N Okafor
    OP
    Rental Property Investor · TX · Member since 2019 · 32 posts · 26 votes
    4y

    @John Brodeur

    I think you're right...





    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free