20 unit Apartment complex - $700k, good deal or not?

15 Replies

Looking at this decent 20 unit apartment complex.  Below are the current break down of income and expenses.  PM fees are also included in Total expenses.  Sales price is $700k.  Loan would be 25% down at 4.5% fixed for 7yrs.  Would this be a good investment?  The numbers have held steady for the past few years and should remain relatively the same.  

Rent Income:  $167,940 

Less: Vacancy/Deductions:  $16,794

Effective Gross Income: $151,146

Less: Expenses:  $81,727 

Net Operating Income: $69,419

Less: Debt service: $31,920

Total cash flow:  $37,499

Originally posted by @Curt Davis:

Thats $35k per unit which is not that bad and it seems to be about $700 per month in rent correct?   Sounds like a fairly decent deal. 

 That's correct.  The current total expenses are around $98,521 , which are pretty high for a gross income of $167,940.  That's like 58% of gross income.  There's opportunity to lower the expenses also.  Basically it comes down to is it worth putting down $175,000 and getting roughly $3000 monthly in passive income.  Thanks for your input.  

You are missing the most important information on here.  What is the current rent roll not rent income how many vacancies, and what is the adverse market rent for the units in your area.  You can't begin to understand if this is a good deal until you know where those numbers are and if there is room to improve.

I had an owner purchase a 20 unit apartment building in Norfolk and the purchase price was 829k, but it was under managed, there were 4 vacancies, and the expenses were outrageous.  When I took over in August 2013 income for that month  was $7,858.00 (not including the mortgage payment).  This year I was able to reduce the trash bill by about $300 a month, converted each tenant to my new lease and had them start paying their own water bills, rehabbed the 4 units that were vacant, raised the rent in at least 50% of the units, and I just cut a check to the owners for August 2014 as $10,587.00. 

The units are well maintained and I don't see much cap ex in the near future (knock on wood). The 10% vacancy is just an average amount, currently there are no vacancy and hasn't been one in over a year. Rentals in this area seems to have stabilized and with SFH prices going up, there should continue to be rental demands. Current PM seems pretty good and answered all my questions. Thanks for all of your replies and input.

Wall Street averages nationwide 31k per door. If you can get that price and in Cali thats a bargain. The LA investors I know want out of Stockon for management reasons so factor that in longterm.

Thanks,

Matt

If not a lot of Capex sometimes you just run across a motivated seller in life with a good product to sell at a great price.

When you find those things lining up you have to move fast.

I would make sure a large tax assessment rise isn't fixing to happen or a large increases on charge per gallon of water usage etc.

Capex and utility is always the cash flow killers.

Originally posted by @Joel Owens:

If not a lot of Capex sometimes you just run across a motivated seller in life with a good product to sell at a great price.

When you find those things lining up you have to move fast.

I would make sure a large tax assessment rise isn't fixing to happen or a large increases on charge per gallon of water usage etc.

Capex and utility is always the cash flow killers.

Most of you guys agree it's a good but then, based on the numbers provided? This will potentially be my first commercial buy. Currently only have a few duplexes and SFR. This will be something different. Thanks for all the input.

Welcome to BP.

It appears to be good deal based on numbers you have provided. 

In my opinion, two factors need more explanation / clearer. 

1. I don't see cap ex (funded reserves). You have must allocate a number for it. 

2. Age / condition of the subject property. If it's an older, not very well maintained property, your will maintenance and repair figures will go up significantly.

Hope it helps.

James Syed, Real Estate Agent in IL (#471018522)

What do you plan to do after the seven year loan is up?  I am just trying to figure out how to finance these larger properties.  Do you have a balloon at the end of the 7 years, and you just go out and find another lender, or will your current lender refi the balloon?

I will echo what some of the others have said with getting a firm grip on capex and the market trends.

Here are some other things I would like to know before making a call on it:

  • What type of area is this A, B C or worse? 
  • How old is the building
  • How old is the building's infrastructure (electric, plumbing, etc.)
  • What is the delinquency rate of monthly rent? Being fully occupied isn't worth jack if they aren't paying!
  • Find out the true vacancy rate for the immediate area. It isn't hard to run into 20% vacancy in tough areas.
Originally posted by @Tou V.:

Looking at this decent 20 unit apartment complex.  Below are the current break down of income and expenses.  PM fees are also included in Total expenses.  Sales price is $700k.  Loan would be 25% down at 4.5% fixed for 7yrs.  Would this be a good investment?  The numbers have held steady for the past few years and should remain relatively the same.  

Rent Income:  $167,940 

Less: Vacancy/Deductions:  $16,794

Effective Gross Income: $151,146

Less: Expenses:  $81,727 

Net Operating Income: $69,419

Less: Debt service: $31,920

Total cash flow:  $37,499

Looks like it's about a 10 cap and the financing sounds very strong. If it's in a decent area, at least from what I see, it looks like a good deal to me.

@Tou V.  

Tou, another thing to keep in mind is when you will be potentially closing (if you pursue this deal). IF you decide to close at the end of the month then you will be responsible for collecting the rents for the next month. In addition to that, you won't be getting any rent credit towards your closing costs. Example: I closed mid month and got about 12k rent pro-ration towards the closing. Meaning I brought 12k less to the cash table. Ask the current owner about security deposits & taxes, that will also be a huge savings on the cash you have to bring to closing. So your 25% down may significantly reduce as you will have closing credits from the seller (taxes, rents, security deposits). Ultimately you Cash on Cash return will go up if so. I just closed a commercial deal and was required to put down 20%. After all the credits, I ended up bringing 16% down which was a decent amount of change! Sure, I'll have to give security deposits back at some point and time as well as pay the taxes BUT it won't all be at once!

Another tip I got in regards to closing mid-month and settling up with post closing rent-proations. Below is a thread response in regards to my situation which may be beneficial for you prior to closing! If I would have known this strategy I would have implemented it myself!

@eric doud (fellow BP member) :

You should always write your contracts to say rent as advertised not collected. We have always done this and the issue has even came up about it. This way when you go to the closing table all money is accounted for and paid to the person entitled.

At the time of closing you can go to the tenants and tell them that you are the new owner or Property management. Explain to the tenants that didn't pay there rent that the previous owner paid your rent for the month as per the written contract and explain to them that you will enforce the lease and that if you don't pay your rent the next month, the 5 day notice will come and you will follow through with court action.

We have found that most sellers are selling because they can't control there asset and let the tenants walk all over them and most tenants that don't pay or only pay half can pay if it is made a priority by the new owner.

Originally posted by @Nik Suri:
You should always write your contracts to say rent as advertised not collected. We have always done this and the issue has even came up about it. This way when you go to the closing table all money is accounted for and paid to the person entitled.

Nik, could you please elaborate on this statement "rent as advertised not collected"?

What exact phrase should the contract have? How does the settlement look like in this situation:

Advertized rent $10K/mo
Collected rent $9K in the last month.

Should the seller bring uncollected $1K to the closing (or reduce the price)?
Or would the buyer collect it later and pay back to the seller?

Thanks
Nick