Looking for my first Apartment Complex

7 Replies

Hello everyone!

It's a wild and wooly 2015 so far! There are currently 6 apartment complexes available in my market area, 2 of which are in D or worse areas, 2 are represented by REALTORS specializing in residential transactions so they're less than knowledgeable on what they're selling, and finally the last 2 are being represented by Commercial Real Estate Firms.

The one I'm currently looking at has got me a bit confused. Here are the vital stats:

Asking price: $495,000

Proposed Cap Rate: 11.33%

11 units (9 - 1 Br/1 Ba, 2 2 Br/1 Ba) 1 BR rent for an average of $650, 2 BR rent for an average of $855. On-site Laundry facility. Renovated in 2011. Currently sitting at 85% occupancy.

Based on what they claim to be 2014 actual numbers here is the financial summary for the property:

Scheduled Gross Income - $92,980

Operating Expenses - $27,859 ($4,556.05 of which is 2014 property tax verified at the county. None of the other expenses are verified yet.)

Net Operating Income - $56,069

We've recently experienced an oil boom in West Texas which has taken a huge hit, weakening rents in the area, because several oil firms have laid off many of their workers while oil is at a current low price per barrel, so the rents which have been collected may not remain as high as they were in 2014.

My primary concern is that the expense ratio seems unrealistic to me, I've been accustomed to considering 50-60% as normal for expense ratios in my local area, this complex claims to have a roughly 30% expense ratio. I will have a full breakout on the income and expenses (which seem really low to me) once the listing agent releases the documentation to me.

I'll be looking at the property Wednesday or Thursday, any thoughts and guidance would be greatly appreciated.

Thanks for your time, make it a great day!

Mike Richter

Mike Richter, Richter Real Estate Holdings, LLC

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Mike,

What city is this in?

Thanks,

Justin Duke

Petroleum Engineer

My 02 cents based on my local market (Sacramento, Bay Area and Central Valley) is that you need to network with the commercial brokers that specialize in multi family. Check out the local business journals "Heavy Hitters in Commercial RE" awards and call or email those guys. Be very specific about what you want and can actually close on. Build credibility with them. The best apartment deals never hit the open market and are spoon fed to their favorite buyers that they know can perform. The bad deals are floated on loop net for the general public to bite on.
There are virtually no buyers agents and the listing agent double ends the deal most of the time on smaller properties.

30% operating expense in Texas sounds unrealistic.

First off, this is in San Angelo Texas.

@Joe B. , thanks for the information. I'm set up with a local commercial guy, I'm interested in building up my portfolio of transactions to eventually get my CCIM as well. We've got a good working relationship, and he understands my current scope of what I'm looking for and can perform on quickly.

I suppose it'll be a matter of coming up with estimations of expenses and craft an offer based on that, providing adequate justification. By looking over the numbers, a 30% expense ratio seems to be out of the realm of possibility.

Mike Richter, Richter Real Estate Holdings, LLC

Hey Mike.  I'm over in Abilene.  How is it coming on breaking down the expenses?

Originally posted by @Mike Richter :

Hello everyone!

It's a wild and wooly 2015 so far! There are currently 6 apartment complexes available in my market area, 2 of which are in D or worse areas, 2 are represented by REALTORS specializing in residential transactions so they're less than knowledgeable on what they're selling, and finally the last 2 are being represented by Commercial Real Estate Firms.

The one I'm currently looking at has got me a bit confused. Here are the vital stats:

Asking price: $495,000

Proposed Cap Rate: 11.33%

11 units (9 - 1 Br/1 Ba, 2 2 Br/1 Ba) 1 BR rent for an average of $650, 2 BR rent for an average of $855. On-site Laundry facility. Renovated in 2011. Currently sitting at 85% occupancy.

Based on what they claim to be 2014 actual numbers here is the financial summary for the property:

Scheduled Gross Income - $92,980

Operating Expenses - $27,859 ($4,556.05 of which is 2014 property tax verified at the county. None of the other expenses are verified yet.)

Net Operating Income - $56,069

We've recently experienced an oil boom in West Texas which has taken a huge hit, weakening rents in the area, because several oil firms have laid off many of their workers while oil is at a current low price per barrel, so the rents which have been collected may not remain as high as they were in 2014.

My primary concern is that the expense ratio seems unrealistic to me, I've been accustomed to considering 50-60% as normal for expense ratios in my local area, this complex claims to have a roughly 30% expense ratio. I will have a full breakout on the income and expenses (which seem really low to me) once the listing agent releases the documentation to me.

I'll be looking at the property Wednesday or Thursday, any thoughts and guidance would be greatly appreciated.

Thanks for your time, make it a great day!

Mike Richter

 According to the National Apartment Association, the national average for expenses is roughly 40-46% not including debt service.

See this link, it's a good valuable resources.

http://www.naahq.org/sites/default/files/naa-documents/income-expenses-survey/2013-Income-Expenses-Summary.pdf

I agree that skepticism is warranted.  The cash expenses are possibly true if the owner is milking the property for cash flow and skimping on capex/repairs (though the owner should accrue a reserve for those costs).  It's definitely wrong if the owner is paying for utilities.