Is this a good Investment?

Question

Hi BP, Is this a good Investment? Me and my 2 partners are thinking of putting funds together for this deal in particular. I realize there are many excess expenses not listed but more or less this what i came up with being that this will be my first Large Multifamily purchase.

Fox Hall

Price

$1,400,000

Property Type

Multifamily

No. Units

45

Property Sub-type

Garden/Low-Rise

Building Size

36,712 SF

Property Use Type

Investment

Price/Unit

$31,111.11

Cap Rate

12%

Facts:

Scheduled Gross Income: $267,420

Scheduled Monthly Income: $22,285

Annual Operating Expenses :   *taxes - $18,706   *maintenance - $45,000   *property management - $26,742   *miscellaneous - $10,000Estimated Expenses: $100,448Annual Net Operating Income: $166,972Monthly Net Op Income: $13,914.33Description:The Fox Hall Apartments feature 45, one, two and three bedroom units in 6, Two-Story Apartment Buildings, Plus 1, Single-Family House built in 1963 with Leasing Office and Laundry Facility. All 45 units in total are fully occupied and rented. This complex is also located a few blocks away from Clayton State University.If Financed:Cash Down 20% - $280,000Financed 80% - $1,120,000With 5% APR and 30 Year Amortization Monthly Payments are an estimated $7516.00Cash Flow:Monthly Income $6398.33

*taxes - $18,706

*maintenance - $45,000

*property management - $26,742

*miscellaneous - $10,000

Estimated Expenses: $100,448

Annual Net Operating Income: $166,972

Monthly Net Op Income: $13,914.33

Description:

The Fox Hall Apartments feature 45, one, two and three bedroom units in 6, Two-Story Apartment Buildings, Plus 1, Single-Family House built in 1963 with Leasing Office and Laundry Facility. All 45 units in total are fully occupied and rented. This complex is also located a few blocks away from Clayton State University.

If Financed:

Cash Down 20% - $280,000

Financed 80% - $1,120,000

With 5% APR and 30 Year Amortization Monthly Payments are an estimated $7516.00

Cash Flow:

Monthly Income $6398.33

Annual Income $76,780.00

*** 969 Forest Ave Forest Park GA 30297

Joel Owens · Answer

Street view shows a drainage ditch going right through the middle of the property. A couple boarded up houses.

You have direct competition across the street from a similar age apartment complex so would need to know what they are doing.

Look for "loyalty factor" of the tenants at your building. Like to see 50% on the rent roll for the last 3 years or longer. That shows stability on some level to the cash flow for the complex IF the tenants have been paying on time. On an older building you do not want constant turnover as tenants live hard in those units and to get rent ready each time is costly.

It's likely water is paid by the landlord. There are a host of problems that come with a building built in the 60's. Asbestos, lead based paint, galvanized plumbing internally and going to the main at the street, electrical issues, etc.

For that old of a building you would need a very detailed inspection including scoping the lines for each unit by a plumber and working your way back to the street connection.

First verify that property taxes have recently been re-assessed higher in your costs. If they have been going up just a little each year expect a large increase as the cities and counties are now looking for money in what they deem a healthier economy. Also count on utility companies raising usage rates even with no leaks. Additionally take 267,000 gross expected rent and make sure that is at market rent or below ( preferably at 50% or below) and that no rent credits were given to lease up.

Example if markets rents for comparable buildings are 500 to 600 a month you want to be at 550 or below. This gives room that if rents eventually drop you are still a good deal to retain tenants in the marketplace instead of being at the top and everyone flees to cheaper accommodations.

If a unit is leased at 500 but first months rent was free then you really have 500 X 11 months = 5,500 /12 months = 458 actual rent and not 500

Let's say 267,000 is the actual number for gross expected rents and landlord covers some utility. Take 267,000 and go by .40 ( 60% costs) which is normal on an older building like this = 106,800 NOI

106,800/ 1,400,000 sales price = 7.6 cap rate going in.

This DOES NOT include any immediate capex found with the property. Say the inspection revealed 50,000 worth of issues needing attention right away. Now the price has to be 1,350,000 to hit the same 7.6 cap rate.

If you take 108,000 expected expenses by your estimate and divided by 267,000 gross expected rents you get 40% costs for a building built in the 60's. If those are the sellers numbers there is almost guaranteed to be deferred maintenance issues and not realistic.

The only time I have seen 40% opex is on a brand new constructed building in the first 5 years of ownership but as the asset ages the costs start to go up to maintain the building properly.

Oren K. · Answer

Michael,

As you say yourself, without all the numbers (e.g. vacancy, insurance, etc.), it is difficult to provide meaningful input. What stuck out to me was the maintenance; at approaching 20%, that seems high unless there are a lot of capital expenses built in. Having said that, total expenses of only $100K, a bit over 2K per unit, when the scheduled income is nearly $270K on property build in 1963 seems low.

Also, make sure you understand the property taxes. Do NOT use the current taxes in your calculations. Figure out what the property taxes will be at the purchase price and use that number.

Good Luck,

Oren

Is this a good Investment?

Fox Hall

Price$1,400,000Property TypeMultifamilyNo. Units45Property Sub-typeGarden/Low-RiseBuilding Size36,712 SFProperty Use TypeInvestmentPrice/Unit$31,111.11Cap Rate12%

Price $1,400,000 Property Type Multifamily
No. Units 45 Property Sub-type Garden/Low-Rise
Building Size 36,712 SF Property Use Type Investment
Price/Unit $31,111.11 Cap Rate 12%