This is a great deal!.... Right??

26 Replies

Hey BP Community,

I'm dipping my toes in the apartment water so to speak, and someone brought this deal my way.

Here are the numbers:

$1.2 million purchase

Current occupancy: 58%

Units: 64

Average Rent Per Unit: $550 (conservative)

Area occupancy average (subject property removed): 90 + %

Why so many vacancies?:  Poor management and repairs needed in many of the units.

If I could bring the property up to market averages by renovating the units and getting a decent property manager in there, these are the numbers:

90% occupancy at $550 per unit = Gross Monthly Rental Income of $31,900.

Yearly Gross: $382,800 x 50% rule

NOI: $191,400

Tear this apart, tell me what I'm missing and if I should run for the hills or lock this down?

@Joel Owens , @Jay Hinrichs , @James Wise  @Matt Faircloth , @Brandon Turner , @Joshua Dorkin   I would particularly value your input.

Thanks!

I'd like to point out that you'll need $200k+ down to buy this building (20% down financing, you may need even more ... plus closing costs).  Your debt service, taxes and insurance will be a minimum of $10K/month ... and you're 'target' income is $32k, but with the current occupancy, you're coming in at ~$18k.  Are you going to be able to get the renovations done in a timely manner? 60% occupied means you need to renovate and rent ~24 units.  Also, you may be forced to lower rent to uptick occupancy, which will alter the basis of your analysis.

how much is it going to cost to get all units rent ready.... that's the question.

Also, what is your intended method of financing?  If you happen to have $1.2 million laying around, that changes the scope of the discussion a little bit.

@Jeremy Pace

Thanks for the input, I've taken all that into consideration.  I plan on doing standard commercial financing 75-80%, with 20-25% down.  Unfortunately I don't have 1.2 million laying around, but plan to someday soon!

@Jay Hinrichs

I've estimated $100k.  4 of the units need total updating, the remainder need appliances, paint and carpet.

@Andrew Davis

How long will it take you to complete the necessary renovations/updates?  Will you be using a property management service?

@Jeremy Pace , I've estimated 6 months.  I will be using a property management service.

From the sound of it (disclaimer!!! i'm not omniscient), this sounds like a deal that you could do well with.

Any landlord paid utilities? If so 50% might be too low. Who's the current owner and why are they neglecting it?

@Jeff Kehl , previous landlord neglected it and the bank took it back.

New tenants are on a RUBS (just for water).  If I close on it I will look into a system that tracks tenants water/electric usage and charges them directly.  Not separately metering.  I forget what it's called, it was mentioned in one of the podcasts awhile back.

The only other utility is trash.

@Jeremy Pace what?!  I'm so disappointed, I always thought of you as a RE shaman.

Seriously though, I really appreciate the input and feedback.

@Andrew Davis

  I would look at the reasons its in the condition its in.. many make the statement the previous owner let it go to pot.. that's an easy one...

what I have seen if this is C or D class is that they can be almost impossible to keep up and keep rented.. turn over and damage kills the property and you end up in the same boat as the seller is sitting in right now.. I have seen it happen numerous times.

and in those tough to manage buildings PM is not going to save you... many times they are the one's taking advantage of you..

@Andrew Davis ,

From what you have described, it looks like a great deal if your numbers are accurate. I would also ask what the cap rate for the area is and verify that the asking price is comparable for similar cap rate building sales. If your area is a 10 CAP, then the asking price seems on par for the numbers you've provided.

If you're able to put this together, and execute close to what you're estimating, you could be having the $1.2MM a little sooner than you expect. Once you get to 90%+ occupancy, you will have an opportunity to refinance for just shy of $2MM at a 10 CAP (Another good reason to find out the cap rate is so you can determine what banks will offer in terms of financing once you have improved the NOI on the property).

If you're inexperienced, refinancing the property may be a lot more difficult than if you already had several properties under your belt.  It might be worth it to partner with someone who has the experience in order to pull the money out more quickly and move on to your next deal.  There could be a difference in YEARS in terms of refinancing if you don't have the experience the banks are looking for.

Good luck!

@Andrew Davis

  of course I have no clue as to what class of property this is ...

my two first hand experiences were both Orygun friends of mine who tried to buy low end apartments.. One in Memphis for 6 k a door and the other in Oklahoma city.

the one in Memphis after buying it for 500k and sinking 500k into it they ended up right were it was when they bought it 18 months later 40% vacant with many trashed units. It was C- To D class and I told them don't do it tenants will literally kill you. Sold out for 600k before it got any worse  400k lesson.

The Oklahoma one.. it was 300 units and the management were thieves ... My friend ended up moving there and running it them selves had they not they would have lost it to foreclosure and lost all their equity they had rolled into it. they finally sold this year at got made whole... but had to change their life for 5 years to get that outcome.

@Jay Hinrichs , good points.  I would put in the B-C range.  Very low crime, average schools.  Yikes, those are some horror stories for sure, I'll definitely stay away from those lower end properties.

@Joshua Nudell , I am inexperienced in the commercial MF space, so I will definitely be seeking out a partner.

First off, double your fix up number ($1500/unit), and that's without any other repairs or updates.

Hey Andrew,

What town is this in?  I didn't see if you answered this but is it a B, C, or D class area?  Also if the units are in rough condition what is needed to spruce up the common area and exterior?  You will need these areas to pop to support an aggressive lease up campaign.  Also how is the roof, lobby, and is there an onsite laundry?  Heating system needing upgrades?  I would pay close attention to all of these things as if the prior owner (before the bank) was neglecting the tenants and the units they were also deferring preventative maintenance on all the mechanicals and major items too.  Get some contractors to walk the site and give you estimates as you may be on the low end from your estimates.

For financing you MAY be able to get a bank to lend you the construction money up front as the building SHOULD appraise for more than your purchase price once it's repaired and fully leased.  An alternative would be to raise some Joint Venture partners.  There are event hard money lenders that will lend you the entire nut for the purchase and rehab, just pay them a portion of the property value once your build out is done and you refinance to a permanent loan.  This type of deal allows for creativity so be sure to think outside the box.

I hope that helps!

Matt

If the property is in florida, then your expenses will be at lease $300 per month per unit. I would get with your third party manager first to come up with realistic budget. Secondly, if you haven't talk with your lender, you probably will not get an 80% loan up front, you may have to get an earn out.

@Wayne Brooks thank you.

@Matt Faircloth the property is in Jacksonville, FL.  Average cap rates between 8-9%.  I'd give it a B: low crime, average schools, 75% home ownership.  

That's really good to know about getting a renovation loan, and also about the hard money lenders, I will definitely keep that in mind.  I really appreciate your input!

@Nicolas Paez, good insights, thank you!

Originally posted by @Andrew Davis :

@Wayne Brooks thank you.

@Matt Faircloth the property is in Jacksonville, FL.  Average cap rates between 8-9%.  I'd give it a B: low crime, average schools, 75% home ownership.  

That's really good to know about getting a renovation loan, and also about the hard money lenders, I will definitely keep that in mind.  I really appreciate your input!

@Nicolas Paez, good insights, thank you!

 What happened? Did you purchase the property?

Originally posted by @Account Closed :

Hey Greg, thanks for the follow up.  Alas... I did not.  I think it would have been a great deal, but it was an auction property and the deadline was too tight.  It was very informative for me though, and am continually looking at apartments and commercial spaces.

@Andrew Davis

I second @Wayne Brooks on the rehab costs.  Even on the back of napkin underwriting think about this...

4 decent size rent readies - 5k/each = 20k 

+

Appliances, paint, & carpet on 60 units = $1,500-3k/each = 90-180k

I would say you are at a minimum 200k without any other items.  You can make money in C class rentals however you need to be careful with underestimating rehab costs & the operating costs of this type of tenant base.  Most people fail at one or the other (or both).  And they end up with expense creep from on-going repairs (low or no cash flow) or don't realize the cost of operations (which hurts cash flow).  

If it's a solid deal in a good C class area in a stabilized or growing area then the numbers listed should work with a larger rehab. 

@Andrew Davis - Good luck with everything. Quick question slightly off topic, but how did you find/figure out the home ownership rate in the area? Thanks!

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