Please help! Trying to buy an apartment building

Multi-Family and Apartment Investing
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Please help! Trying to buy an apartment building

Faye Fu
Boston, MA · Member since 2014 · 9 posts · 0 votes

Hi,friends

 I am helping a couple friends to buy an apartment building . It is located at a college town, total 32 units and 46 beds. It was built in 2011-2012. Last year's net operating income is 266,000. seller is asking 3.65 million. 100% rented. The seller is pretty firm with the price, because the condition and location. Do you think it is worth this much?

My friends are from overseas, one has green card  for couple years, another one doesn't have. It will be difficult for them to get loan.

I have never dealt with apartment building before,but they trust me, I really want to make this work them, any advise will be appreciated.

Thanks!

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y

$4 million is too much for $361K in gross rents.

$266K is unrealistically high vs. gross rents of $361K.  That might be the actuals for the years of data you've been given, but won't be the case over the long term.

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  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    12y

    @Faye Fu We will need a lot more information to do a deal analysis. What is the vacancy rate, not just right now, but going back a couple of years? How much are taxes and insurance? How much are utilities and what utilities does the owner pay? How much has the current owner spent on maintenance in the last few years? How much would property management cost for this building? How old is the building, and how long has it been since it was remodeled/updated? How much are the rents compared to similar buildings nearby? Does the building have extra income through coin-operated laundry, etc? What kind of tenants live in this building (working class, college students, section 8, young professionals)? How does the cap rate compare to other similar buildings in that area?

    There are many questions that I would need to answer before judging this deal.

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  • Curtis BidwellPro Member
    Rental Property Investor · Olympia, WA · Member since 2014 · 777 posts · 744 votes
    12y

    Wow, they think very highly of their property!  With $266k income you will need 40% down to ALMOST break even!  They are looking at about a 4.7% cap rate based on some best-guess assumptions.  At a more typical 7-8% cap rate the value would be closer to $2.25m.  Unless there is something significant that we don't know, it doesn't look like you'd be doing your friends any favors pursuing this deal.  

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  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    12y

    Why is the seller selling? Doesn't seem very motivated to me. I'd line up some financing for your friends, and keep looking elsewhere.

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  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    Hi Faye,

    You said the NOI = $266k. What is the annual gross income? This building is almost brand new so the maintenance is minimal, which would give a higher NOI. That's the reason why I asked for the annual gross rent.

    What is the average cap rate for the area? More important, what is the average GRM (Gross Rent Multiplier) for the area?

    Do you know why the seller is selling?

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  • Michael Wolffs
    New York City, NY · Member since 2014 · 155 posts · 41 votes
    12y
    Originally posted by @Curtis Bidwell:

    Wow, they think very highly of their property!  With $266k income you will need 40% down to ALMOST break even!  They are looking at about a 4.7% cap rate based on some best-guess assumptions.  At a more typical 7-8% cap rate the value would be closer to $2.25m.  Unless there is something significant that we don't know, it doesn't look like you'd be doing your friends any favors pursuing this deal.  

    They/re giving the NOI, so you don't have to make any expense assumptions. The cap rate based on that NOI is 7.28. That's not great, but not terrible either. It really depends on the market.

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  • Faye Fu
    OP
    Boston, MA · Member since 2014 · 9 posts · 0 votes
    12y

    Thanks for all your help! Sorry I wasn't feeling well last night, didn't respond as timely as I wanted.

    The tenants of the building are mostly college students. 

    266K is the net income after all expenses including tax, insurance and management. The gross for 2013 is 361k.

    It is a college town with strong rental market. I lived there for 5 years myself. Most apartments were built in 80 or 90s. This one is right on Downtown, very close to school and university, in fact, the shuttle bus stop in right at the front of the building. There is no land around university to build in foreseeable future.

    It is listed over 4 million.

    The reason for sell, according to the seller, they have more capital in this property, the are building another project, need the money for the new project.

    Another news is the city just approved 32k/year property tax rebate for next 8 years, which is not included in the calculation.

    Thanks again!

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    12y

    $4 million is too much for $361K in gross rents.

    $266K is unrealistically high vs. gross rents of $361K.  That might be the actuals for the years of data you've been given, but won't be the case over the long term.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    Supply and demand. Seller is hoping for less experienced investors to pay a premium for the property.

    I tell my clients tomorrow is another day, do not get emotionally invested and overpay, and there will be more properties to consider. Now my clients are realistic to the marketplace so if a great deal is a true 8 cap they aren't wanting a 11 in a supreme location etc. That's unrealistic and they will look for years and not buy anything for example.

    How new is this property to market?? I find sellers will consider a lower offer after it has been on for a few weeks with little action. Also if your buyers are getting a loan the seller will underwrite their chances of getting a loan and closing. Being out of the country investors most banks will not lend to them. In that deal size range in 3 mill you can get away from bank lending where it is not an issue. The lender will look more at the property, the liquidity and combined net worth of all the partners buying and reserves left after down payment.  

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  • Curtis BidwellPro Member
    Rental Property Investor · Olympia, WA · Member since 2014 · 777 posts · 744 votes
    12y

    @Michael Wolffs Good catch!  Certainly makes a difference.

    @Faye Fu  Thanks for the additional numbers. That adds good clarity.  Assuming 25% down you can anticipate almost 6% cash on cash.  Personally, $4k/mo seems thin to me for such a deal.  Also, I would want to see the lease agreements and terms offered.  Often times students don't stay a full year, even when under lease, and they change roommates pretty regularly.  Turnover is a constant in the student market.  I have 24 units just over a mile from a university.  I have worked to minimize my student population to add stability.  I also require all students to have parent co signers to guarantee rent AND add a layer of accountability for behavior.  

    Btw, the tax abatement is a nice perk and certainly starts to make the deal interesting!

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  • Faye Fu
    OP
    Boston, MA · Member since 2014 · 9 posts · 0 votes
    12y

    Jon, Joel and Curtis , thanks again! I am meeting with the seller tomorrow. I requested all monthly utility bills for 2014, copies of current lease and financial statements of 2014. I will report updates  here maybe tomorrow night..

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    12y
    Originally posted by @Faye Fu:

      seller is asking 3.65 million. 100% rented. The seller is pretty firm with the price, because the condition and location. Do you think it is worth this much?

    Thanks!

    The very first thing I would do is determine what is the FMV, fair market value. I don't see how any decision can be made unless you have that number.

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  • Michael Wolffs
    New York City, NY · Member since 2014 · 155 posts · 41 votes
    12y

    Faye,

    Have you determined what the market cap rate is for similar properties in the area?  A lot will also depend on how the project will be financed, and how expensive the financing will be.

    1Reply
  • Faye Fu
    OP
    Boston, MA · Member since 2014 · 9 posts · 0 votes
    12y

    Hi, friends

    It has been a few days since my last post. I apologized for that. A lot of back and forth happened and I want to give you some updates for this property.

    The current situation is the seller set a final at 3.615 mil, the buyers want 3.6 mil. Seller refused, buyers were not happy.

    This morning the mortgage company gave me a quote, 4.35%, 10 year term, 30 year amortization, LTV 75% . And he said he probably can lower a little bit. Personally I was happy with it. But this evening he changed to 4.35-4.45%, said 10-year treasure is moving a lot, lender can't lock it till closing. To get lender to lock the rate, LTV has yo be 65%, plus pay 2% refundable deposit, if the deal doesn't close, lender will keep the deposit. The rate will be 4.25-4.3%. Again, the buyers weren't happy to hear this.

    If we put 25% down, the cash on cash could be close to 11 , if we have to put 35% down, cash on cash will lower to around 8.

    I don't know what will happen tomorrow. The seller said he has another buyer waiting. What do you think?

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  • Michael Wolffs
    New York City, NY · Member since 2014 · 155 posts · 41 votes
    12y

    $15,000 on a $3.6 million dollar deal isn't going to move the needle much.  Unless you're RIGHT on your necessary yield threshold, it shouldn't make that much difference.  

    One issue would be what terms the seller wants.  Don't give up on your due diligence contingency, et al. 

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    Why is the lender moving the needle to 65% down?? It might be because they underwrite student housing with a riskier criteria than a standard multifamily building. I have seen that happen a few times before where a lender wants 35 to 40% down in that case.

    The seller is quoting really low expenses because the property is newer. As the years go by the tables will turn and the expenses will go up higher and higher. You need to check into the college and if it has plan to expand or build it's own dorms? If so your occupancy and rates charged could drop on the building in future years.

    Faye you are saying lender charges a refundable 2% deposit but if it doesn't close they get to keep the money. No way should you agree to such a provision. Who is this lender?? What is their track record??

    Before your friends go putting down earnest money and everything else you need to really make sure the property works on paper for the price paid and the lender isn't a glass house with smoke and mirrors trying to take your money. The treasury does fluctuate when you go for a lock.

    Just make sure you do not have  a lender  that promises the world and then re-trades you much higher. Until you lock it is normal there is some small fluctuation but not  a lot.

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  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    Hi Faye,

    Before we get down to the purchase price, how is this building compared to other buildings in the area? Are you paying fair, below or above market value?

    At $3.615M, it's 10 GRM. Not too shabby for an almost brand new building. However, if other equivalent buildings are selling for 8-9 GRM, you're overpaying for it. The fact that the building is almost brand new, it should be selling for a slight premium compared to other older buildings.

    $95k in expenses is not sustainable over the long run. The owner has already dressed up the numbers to get the highest selling price with a phony cap rate.  At 40% expenses, it's a 6 cap. At 50% expenses, it's a 5 cap. At reported 26% expenses, well........

    4.35% for a 10/1 ARM is not a bad interest rate. If I were you, I would ask for a 5/1 with 10-year balloon amortizes over 30 years. Hopefully, you can get the interest rate down to the low 3%, which would boost your CoC returns.

    Whether or not the owner has a buyer waiting is irrelevant. It's like playing poker. Are you willing to walk away from this deal and potentially calling his bluff, or are you willing to lose this deal over $15k?  

    Best of luck. 

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