Apartment Building Question
Real Estate Consultant · Memphis, TN · Member since 2008 · 23 posts · 4 votes
Hey Everyone,
I just found an apartment building for sale at what I think is a great price, but I would like a second opinion. Here is the information:
List Price: $345,000
Units: 16, All 2BR 1BA
Rent Price: $600 per unit (low estimate)
Taxes: $6,890 per year
Insurance: Approximately $12,000 per year (estimated $800 per unit... is this even close?)
I am very familiar with single family residential homes and have been a wholesaler for a while (over 12 homes last month), but I have never invested in a multi unit building. What other costs am I over looking and would this be a good deal?
Again, you are confusing two conversations about two different investments. The converstaion in July was on small residential units (1-4 units only), and here we are discussing apartment buildings of 16 units or more for that matter.
My reference to you making up the 50% rule was in regrads to you applying thequick back of the napkin commercail analysis to Everyone's small 1-4 unit properties. I refuse to waste any more of my valuable time trying to explain myself to a wall, so this will be it.
Keep on with your methods. I have yet to argue or disagree with it here. I only pointed out for others, that I have a different financial analysis of commercial multifamily units. Thats it!
I do agree with you 100% that a person should do all possible due diligence with every property and that a person should check to see that there aren't unusual circumstances that would make the expenses higher than the 50% rule.
I do enjoy debating these issues with you and I think that the new investors are the winners because they get to see multiple sides of the issue.
Mike
You two are very knowledgeable and extremely analytical.......I've enjoyed reading all your posts (I suck at analytical.....my head hurts)
All that said Mike, ALL I want is to be able to post both factual data and personal experiences and points of view WITHOUT you picking them apart and attacking them or whatever word is appropriate for that, since I know you don't like the word "attack".
Feel free to post your opinions and your expereinces on whatever rules you want. I will post mine and we can leave it at that. There really is no need for all the rest of the b.s. I have to continually defend against.
I've contacted all parties here about playing nice. Vigorous debate about business models is fine, but we will not allow members to attack one another personally. We've removed a chunk of posts that contained attacks and will not put up with any such behavior.
No excuses . . . PERIOD!
My unasked for .02. :)
I am in the big city, Chicago, and have a couple of off market buildings that we are marketing. They have been fully rehabbed and run very efficiently. Building management has been brought in house.
I by no means am an expert and am learning, so my question to the wisdom holders in the group is: are there any exceptions to Expense Ratios being better then 50%.
Is a ratio better then 40% really that hard to believe when product is ran efficiently. The reason I ask this question, is because it's what the seasoned investor zero's on immediately. I am starting to think that people may think we are lying, what would be the best way to address this concern when folks use 50% as a rule of thumb?
Thank you and I look forward to your guidance.
Juan,
I doubt that people think you are outright lying. They simply don't trust you and are relying on their own background. Let's face it. You have every incentive to portray the property through rose-tinted glasses.
Based on my own personal experience, in a solid year I see expenses around 30%. Those are real numbers. The key is that those expenses are calculated when everything is running perfect. 100% occupancy. No legal fees for evictions. No sewer line problems. etc.
When I run my calculations on a building I typically use 50% though. I think the guys here are right that it's a good conservative estimate. If the numbers work based on that ratio then most of the time I should be swimming in cash flow.
That's just my perspective though.
Juan,
To answer your questions, can someone operate with a 30% OE ratio? Yes, but ONLY in a given year or even given multiple spuratic years, but as a whole over time, 30% is impossible.
The only way that happens, is if you buy and exit prior to large capital expenses, get lucky and have 5% or less vacancy rate, etc. etc. But as Mike says, if you own enough rentals for a long enough period of time, you can not expect to "average" 30%. This is not to say that you can not average 40%, because you can. Or 45% or whatever, but 30% is simply unrealistic. Again, it all depneds on your investment strategy, exit strategy, etc. It also depends on which types of investments you are doing as well.
I would just like to point out that 50% is NOT a conservative number - it's the average. If you use 50%, you should be right over time, but you won't be swimming in cash flow.
Mike
alot of interesting replies here, but i saw a note on financials and i wanted to add something:
every property i have bought personally or helped negotiate i have put a clause in the purchase and sale agreement for delivery of financial statements including current and accurate rent roll, expense figures (including actual statements), and tax returns, both personal and business (portions referring to subject property claims). In some cases i've asked for notarized copies of such documents.
I'm a licensed agent/broker myself, so i say this with love and affection for other similar agents, all too often the numbers you see on the MLS or sites like loopnet suddenly change when you get the tax return from the owner.
For example: I made a blind offer on a property based on a listing another broker sent me for a 16 unit. I visited the building and met the owner. We discussed the property as we took a tour and he went on to tell me that his repair and maintenance budget is zero. I found that hard to believe because when i met him he was in the process of painting and cleaning two units that were recently vacated. Maybe he gets paint and carpet free. WHo knows?
Anyway, when i got his tax returns he listed $8,000 a year for repairs and maintenance. $8,000 is more than zero.
Get the financials. if they don't want to give them that should be the first red flag. Doesn't mean you can't move forward, but if you do, you have to accept the risk.
Couldn't agree more Craig. Get the financials and audit them to locate the misrepresentations or the discluded items which are sure to happen. They don't provide, move on or move forward at your own risk.
Thanks again Chris!!!
This was a very good discussion I enjoyed it Very Informative.
Here is how I see this deal:
Rent: $9600/month (100% occupancy)
Less vacancy of 15% (Guessing)
AGI = 8,160
Expenses: $4080 (based on 50% OE ratio, could be higher)
NOI: $4080 monthly
14.19 Cap rate at ask price (very good)
P&I: $1829 $258,750 @ 7% 25 year ammortization
Cash flow: $2251
Cash flow: $140 per unit per month
COC = 28.1% (very good)
DSCR = 2.23 (Stellar and bank approved)
Now lets borrow the 25% down at 8%, 25 year amm.
Additional debt service = $666 monthly
New cash flow = $1585 monthly or $99 per unit (Just made the cut)
New DSCR = 1.635 (still passes bank approval)
New COC = 190% (Only cash down was 10k closing costs) Here is where COC does not mean as much as it can be infinate with no money invested.
When you say "lets borrow the 25% down at 8%" how does this work? Can you finance the downpayment to finance another loan? Wouldn't that come up during the loan process?
Does anyone know how this is possible? Trying to learn different ways to finance.
Thank you!