8 unit In Tucson Deal Evaluation

8 Replies

I am doing a deal evaluation of an apartment complex here in Tucson, AZ. It is listed on the MLS here. Here are the details.

Asking Price $275,000

8 Units

built in 1987

All are 2 bed/1bath

Rent is $500/month per unit

Owner pays water/sewer/trash

Financials:

They were not provided in the listing, so I am estimating on some costs.

Down payment $68,750

Closings Costs $10,000 (estimate)

Mortgage Estimate $1361/month (estimated 5 year balloon, 20 year amortization, 5% interest, 25% down payment)

Annual Gross Rental Income $48,000 ($500/month * 8 units)

Vacancy Loss $4800 (10% estimate)

Adjusted Gross Income $43,200

Property Taxes $3018 (2013 actual amount)

Insurance $1500 (estimate)

Maintenance $4320 (10% Adjusted Gross Income)

Water/Utilities $5760 (estimate $60/month per unit)

Property Management $4320 (10% Adjusted Gross Income)

Net Operating Income $24,282

Operating Expenses $18,918

Annual Income $12,468

Cash on Cash Return 15.83%

Am I underestimating key costs here? Any advice in my analysis would be helpful. I'm not quite in the financial position to purchase this building yet, but I am trying to keep my eyes open to good deals, and this one looked good to me.

402-965-1853

Hey Anthony,

Nice work on running the numbers. I see your GOI($43,200), expenses($18,918), NOI ($24,282) and calculated debt service ($16,332). I am not following hiwnyour reach an incomenof $12,468? Annual income would be NOI-DS=$24,282-$16,332=$7,950, so cash on cash= cash flow ($7,950/cash invested {dp=$68,750 + closing costs $10,000=$78,750})=10%. Is there another source of income not included in your analysis (laundry, late fees, application fees etc) to get income of $12,468? Otherwise, it looks like your analysis is solid.

On the listing/area, 85713 can be a pretty challenging zip code and for a 2bd1ba renting at $500, the tenant pool also quite difficult.  I suspect your vacancy rate will be higher than 10%, expenses from turnover will also be higher.  These 2 factors will also reduce your returns.

Thanks for sharing!

Mike

I agree with @Mike T.  .  Numbers aside, having grown up in Tucson, that is a very risky part of town. I would expect high turnover and high maintenance costs.

edit* typing from my phone, above typo= " how you reach an income of"

@Mike T.  has got it right with his numbers, I came up with the same 10.1% coc return given the supplied totals. A few other questions to consider, in addition to the solid ones above:

  • What's current occupancy? Assuming it's not 100%, did you consider upfront leasing costs as well as ongoing leasing/marketing totals?
  • What's market occupancy?
  • What are market rent for similar 2/1 units?
  • Are there any repairs needed, appliances requiring replacement, etc.?
  • The lender might require you to set aside a monthly replacement reserve which isn't factored in your totals

@Mike T.   thanks, I think my numbers were getting mixed up somewhere. The numbers you provided are right.

In terms of the area, it is a rougher area than I would prefer and the building probably will face higher maintenance costs and higher turnover. Would you suggest reserving 15% for maintenance?

@Justin Knapp   I'm not sure of current vacancy, I will have to inquire. I'm not sure on occupancy for that area, the 4 plex that I own is in a better area in Tucson. In terms of market rents for that area, the building does fall into the average range of market rents. I'm not sure about any repairs needed. 

Also I didn't calculate any reserve funds needed as I was just trying to figure out cash flow to see if this is a good deal, not the total amount of money needed to purchase the property. I don't intend on purchasing this, I am really just trying to practice analyzing larger multi-family deals.

Keep in mind my calculations were done based on the list price. What do you think would be a better price to offer for the property based on the property's location, the fact it could face higher turnover, etc.

402-965-1853

A solid value / price is tough to gauge @Anthony Gayden without any of the other answers because creating that number is a function of what the market can bear (rents), what you will need to put into it to get a solid tenant, and what you can convince the lender to assume. Overall, lower quality unit = lower quality tenant = higher risk and higher bad debt (and higher legal costs) = lower NOI = reduced value. That's a simple way to look at it but not knowing the full totals that will go into the property limits how much we can refine a final value. You're definitely on the right path, and if you have the stomach for what others seem to think is going to be a challenge due to the area and potential tenant base and are willing to deal with the headaches, then keep digging into the numbers. The owner might not see it your way now, but if no one else bites within the next month or so you can always revisit and offer better terms if he's willing to take back a 7 year second it could pay off. I went through something similar in Augusta GA and can say I wouldn't rush into it again - a lot of vandalism during construction and ample scrutiny from the city since it was a section 8 property and the previous owner ran it down to near condemnation. I had to spend a lot of time down there monitoring things and even some nights on the site with concerned residents so we could try to catch the vandal. It's a lot of work if you want to do well for the tenants but can pay well if you are transparent with both the city and potential/current tenants.

@Anthony Gayden  To answer your questions on maintenance, I think it is important to get an idea of what needs maintained?  Percentages give you a "ball park" idea and are a good "rule of thumb" but can be grossly underestimated.  For example, when I see 8 plex I immediately think about the 8 units individually.  That means 8 roofs, 8 foundations, 8 interior units that need painting, 8 exteriors that need painting, 8 units that might need carpet/vinyl/tile, 8 hot water heaters or a single boiler, 8 AC or evaporative coolers (if there are coolers, have there been leaks?), 8 sewer lines, 8 toilets, 8 kitchens (8 fridges, 8 stoves, 8 dishwashers, 8 microwaves etc), 16 bedrooms, 24+ doors, 16+ front door locks/deadbolts etc.  As you can see the list of items that might need maintenance can be endless!  As you start to break it down you realize how trivial a percentage can be and this why an inspection becomes your best friend and contingency with your offers.  I hope this helps.  You are well on your way though! Your math is solid, keep analyzing deals, make offers, inspect properties, keep asking questions.  Best of luck!

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