Please Help Analyze This 12 Unit Apartment Purchase

12 Replies

Hello Everyone,

  I have just placed an offer on a 12 unit (3 fourplexes).  Can you please give me your thoughts on the deal.  The numbers seem to be good to me.  Any advice would be appreciated.

Offer price $800K

Owner financed, with $100K down, 30 year amortization, 5% interest, 10 year term

Fully Rented at $800/mo each $9,600 gross monthly rent

$8,300 monthly cost including vacancy, maint, taxes, insurance, property management

I am calculating a 8.7 cap and $69,850 NOI

Thanks for your input!

Brad

Is it an A, B, C or D property? What kind of area is it in? How are the schools? Is there any deferred maintenance? What condition are the units in?

If it's in a town with jobs, good schools, and in good condition I say go for it. If it's in a bad area or has expensive issues to fix I say don't go for it. 

Originally posted by @Brad T. :

Hi Bob,

  Thanks for the comment.  You are able to find 12 cap properties like this?

Brad

There are plenty of $70,000 NOI 's that sell at 12% cap rates.

What areas do you see these in Bob? 

@Crystal L.

Thanks Crystal.  This is a B property in a good area with good schools.  The maintenance seems to be good.  I will find out for sure if my offer gets accepted and we perform the inspection.

Originally posted by @Brad T. :

What areas do you see these in Bob? 

 Brad, too many to name.  How do you know that you are not investing in a 12% cap rate area but paying above market ?

Perfect question, Bob.  From the properties that I have analyzed, I believe that I am in a 8-10 cap area.  Do you have any good advice to determine this?

Thanks again and I do appreciate your feedback.

You'd need to see the NOI analysis of recently closed sales of similar properties. Pretty hard to get for small properties. I'd just look for 4plex GRM's to get a good idea of the actual market value.

@brad t. You are estimating operating expenses at just less than 40%. That's pretty aggressive. When was the property built?

It looks like you haven't consider capital expenditures. You have three buildings, which means three roofs, three structures, three driveways/parking lots, etc etc. You need to appropriately account for capex, or it will sink you.

Assuming you accrue $200 per unit per month for cap ex, you've now gone from a $69k NOI to $43k cash available for debt service. Your debt service will be roughly $45k per year leaving you with realized cash flow of -$2k per year. You may think you are cash flowing $28-29k per year, but this is only true if you aren't accruing for capex. Hold the property long enough and capex will come around.

Let's look at it from another angle. You are paying $266k per building and that building only generates $3,200 in gross monthly income. In the markets I target, I can pick up a building generating the same for about $190k. I don't say this to say that your deal is bad, rather to show you that there are better "cash flow" deals out there; it just takes patience and diligence to find them.

All that being said, you haven't given us many details regarding the property. What's your exit strategy? Is there appreciation potential? How are you going to add value?

For anyone to provide a proper deal review, we would need itemizes numbers, not a summation of the expenses. I'd want to see your estimates vs actuals for every expense line item there is to get a good feel for where value can be added.

This could be a good deal, but we are lacking information. Additionally, you need to account for capex or you will sink when it's times to make those expenditures.

Originally posted by @Brad T. :

Hello Everyone,

  I have just placed an offer on a 12 unit (3 fourplexes).  Can you please give me your thoughts on the deal.  The numbers seem to be good to me.  Any advice would be appreciated.

Offer price $800K

Owner financed, with $100K down, 30 year amortization, 5% interest, 10 year term

Fully Rented at $800/mo each $9,600 gross monthly rent

$8,300 monthly cost including vacancy, maint, taxes, insurance, property management

I am calculating a 8.7 cap and $69,850 NOI

Thanks for your input!

Brad

 Hi Brad,

I may be missing something but if your gross is (9600x12= $115200), and your expense is (8300x12= $99,600), How is your NOI $69, 850? Unless the expenses include the debt service from the seller...sorry if I missed something.

Also, I would ask, what vacancy % did you use, as it seems that they are fully rented right now, but what is the market supporting? Fully rented is great but if the market is at 15% that 100% occupancy won't last... just my 2 cents (only worth 1 cent in today's market ☺)

Dave

For a 12 unit deal - do not obsess with cap rate. Focus on cash flow and return on your investment. Just the slightest loss of income like an extended turn over or unexpected expense will send you cap rate in to the tank. Calculate you cah flow, does it give you a good return? Define your exit strategy. Watch every penny.

Thanks for the input Bob, Brandon, David, Crystal, and Nicolas.

Where do you find multifamily listings to look for comparison properties? I have been looking at loopnet and some individual realtor websites.

Below are all of me estimates right now. Seems like I should hold out for a better deal.

$800K offer (they came back with a $900K counter!)
$100K down, 5% owner financed for 5 years. I would want to hold this long term after a refi after the owner finance is over.

12 units 100% occupied $800/mo each $9,600 per month let's use 98% occupancy, since these do appear easy to rent

Property was built in 1965, 2 of 3 have new roofs, from what I could see there should be less than $5K in initial updates.

I was also thinking about renting washers and dryers to tenants for additional income, since each unit has a laundry room.

Below are the estimates I have been using
-$23,000 yearly taxes
-$5,400 yearly insurance
-8% property management $753/mo is this reasonable?
-$820/mo for water, trash, grass, snow removal
-$400/mo total for repairs and capital (way too low?)

Thanks again!
Brad