100% vacant 20 unit apartment

21 Replies

Hi everyone!
I looked at a 20 unit apartment building. Currently it is 100% vacant. The area is developing and I am assuming in a couple years the area will go up in value. The city is building a huge park, stadium and public transportation is with 2 miles.
The apartment is vacant because there are plumbing issues and not suitable for tenants to live in. The landlord is not making any money except paying expenses. He is asking 260k. Each unit will rent for approx $550-650/month. Renovation will be approx 200k.
I don't know how to value this property and if what the current owner is asking is worth it.
Any feedback would be very helpful. Thanks!
Steve

If you don't know how to value it maybe it's too big of a deal for you at the moment. it sounds like a turn around project that someone who already turned around a damaged property like this should handle.

tenants that pay this rent are not the best renters to handle in GA so you are getting low quality tenants (income wise, job wise etc..)

so that's another risk into the equation especially a 100% VR.

Originally posted by @Steve Yoo :

Hi everyone!
I looked at a 20 unit apartment building. Currently it is 100% vacant. The area is developing and I am assuming in a couple years the area will go up in value. The city is building a huge park, stadium and public transportation is with 2 miles.
The apartment is vacant because there are plumbing issues and not suitable for tenants to live in. The landlord is not making any money except paying expenses. He is asking 260k. Each unit will rent for approx $550-650/month. Renovation will be approx 200k.
I don't know how to value this property and if what the current owner is asking is worth it.
Any feedback would be very helpful. Thanks!
Steve

 @Steve Yoo interested to find out where this is located. PM I can help answer any questions.

My best rehab was 102 unit that was completely vacant besides the bugs, and mice, and varmints. Turned it into 100 condo units , one laundry unit, and one security office.

Alex

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Start with your goal regardless of the property.  What do you want to earn?  10% Cash-on-cash?

Your best case revenue is $144,000 per year if you assume average $600 per month rent.  What would the value of the property be if it needed no work?  That is your best case starting point.

Add in the repair cost next ($200k if that is your all-in number).  Are you making modifications beyond repairs, such as separate utilities for each unit?  Price those in.  Consider how you are going to finance the purchase and repairs.  Consider the timeline and holding costs.  Consider marketing and property management costs.  Remember vacancy, insurance, taxes and permits/fees.

Watch out for new builds in the area with regard to your target quality.  New builds could depress your rent as they increase supply and put a ceiling on the rent you can charge.

How does the bottom line look over your planned holding term?  It's a good investment if it exceeds your goal.  Why "exceeds"?  Because I always miss some expenses.

Jim.

Look if the density rules have changed. Also look at if commercial can go there versus multifamily. Additionally look at how much land this sits on for redevelopment. Value is in usable and buildable land.

Check what is around this property if a lot of new buildings are going up or it's still the old part of town with everything falling apart.

Renovation likely is 300k plus once you count water and sewer lines to street,roof,windows,parking lot, sidewalks etc. It all starts adding up fast.

20 units at 500 a month is 10,000 X 12 = 120,000 gross expected income 

Take away 50% for ongoing opex,management,evictions,vacancy, etc. you have 60,000 NOI

60,000 NOI at a 10 cap for just an okay area is 600,000 sales price.

You will have purchase cost to close it and hard money ongoing fees if you do not pay cash for purchase and rehab. Figure 10% when you sell for 6% commission down the road and additional 4% closing costs for a net of 540,000.

So essentially you will have a massive headache and turn around with little to no equity upside just ongoing cash flow once stable. This is why the highest and best use comes in to play where for example it's sitting on 7 acres and you get 150k an acre from a developer etc.

If the only possible exit is to stabilize and sell there is too much work for any upside. This is why people look for 50% occupied or better because it's easier to turn around with some income. If you are going to take 100% vacant to fully performing you better get an amazing return on your time with equity upside.

@Steve Yoo

You have two Values to look at. 

What is the bare land worth if you tore down the bldg. If the land is worth more than the 260 you just got the building for free. 

How much would it cost to build a new bldg on the site. If your buying under replacement cost then this also may be a good deal.

That's how I would value a non performing piece of property. 

Remember that when you buy you are not buying a property, per say. What your buying is the income stream that property is producing. 

With all that being said if this turns into a deal for you I would consider bringing in a more seasoned investor that has done this before. You will learn a lot and foster a new relationship.

Please remember that the value of this property IS NOT based on what it might rent for after all the work is done. Yes this is important information you will need to know but it does NOT affect the sales price.

Lastly look at what the highest and best use would be. Don't get stuck on its multifamily so it must stay multi family. 

@Steve Yoo As others have said, it is generally best to do a rehab project on something that has some occupancy. 0% occupancy is usually indicative of a larger issue - i.e. broken supply lines, major mold from leaks, etc. You can usually get a few to stay rented, even in the worst areas. I have done my share of apartment rehabs, but never less than 30% occupied, unless I'm looking at changing the usage - like going to condos as @Alex Franks said... then 0% occupancy is actually a plus. 

I will acknowledge I am a bit of a novice but it sounds exciting to me. Your cost to improve estimate sounds very low though. Is that just to fix the basic problems? It seems while it is empty you might as well fix up the whole building common areas and each individual unit.  Good luck with it!

Originally posted by @Jason Hirko :

@Steve Yoo As others have said, it is generally best to do a rehab project on something that has some occupancy. 0% occupancy is usually indicative of a larger issue - i.e. broken supply lines, major mold from leaks, etc. You can usually get a few to stay rented, even in the worst areas. I have done my share of apartment rehabs, but never less than 30% occupied, unless I'm looking at changing the usage - like going to condos as @Alex Franks said... then 0% occupancy is actually a plus. 

@Jason Hirko even if I kept it as Apartments. I would still take the Vacant project but then again it all depends on ones cash position or finances. To make that decision on a project like that. We also did 136 units that only had 25 rented units.

Alex

Originally posted by @Joel Owens :

Take away 50% for ongoing opex,management,evictions,vacancy, etc. you have 60,000 NOI

60,000 NOI at a 10 cap for just an okay area is 600,000 sales price.

Net Operating Income is 50% of gross rents?  You NEED operating expenses to get to Net Operating Income. 

We actually met with the maintenance guy. He lives in the property. He maintains the exterior from people throwing waste on the property. He showed me the problem.
I am the contractor. My client and I went to the area to see another property. I advised him because the extent of work it didn't seem worth while. We decided to walk the neighborhood and this is how we found this place. Current owners contact info was given to us from the guy. It is not listed.
I am thinking going in with my client together so this why I ask. I will be doing the construction. My client has numerous single family home and 1 six unit. This would his first with so much work that needs done on the property. This would be my first as an investment property.

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Look up sites like crime mapping . com

From there you can input dates and see the frequency of the crimes and the severity of the offenses. With any population you will have some crime. The questions becomes is the frequency increasing, decreasing, or staying the same? Also what kind of offenses? If you have lots of domestic disturbance, petty theft, battery, etc. that is not the same level as forcable entry, theft of car, armed robbery,drugs, rape,murder,etc.

Look around at the other buildings. If they are in real bad shape also then even if you rehab you will attract the deadbeats that will trash it again. The good tenants do not want to live in a nice building around junky ones.

You could try to put an option to purchase on this property or do a joint venture with the owner etc. 

The option you put  a little money into rehab and if it doesn't work out and go like you want then do not purchase and walk away. If you purchase and then find out what happens you are stuck. 

@Steve Yoo

Sounds like a distressed seller? How long has it been empty? There are lots of questions here. Is the property listed. What kind of relationship do you have with the owner. Does the owner own building free and clear. How old is it.

Just some of the questions I would want to know before getting into it any further.

Property not listed. Owned it for very long time they say. Compared to many of the other apartments it's actually better maintained on the outside. The maintenance guy lived there 7 years already. Property was not always like that. Owner has another property nearby with more units. He wants to sell that as well but I am not sure with the details. My client should know better. I just know he wants to sell and just leave.

@Steve Yoo   I guess it depends on your financial situation but you might be able to work with the owner.  The fact that is all vacant might actually give you more options.

How long has it been completely vacant?

Originally posted by @Joe Martin :

@steve yoo

So did you go forth with the purchase of the property? I would be interested in hearing how it went?  

One other thing to consider is Asbestos and lead paint abatement. The OP is a contractor and probably knows this but if you have not much experience on older buildings you should consider it. If you start working on a vacant  complex you would have to comply with these per code. My field is construction also so I might go for it depending on the parameters.  

Originally posted by @Joel Owens :

If you buy the building you might want to get the other one as well. You then control the look and feel of the block and tenant base.

So for example if there were 10 quads for 40 units on one street by buying most of them and forming a relationship with the other landlord the area could be transformed.

Thats a good idea too. If you could get them to transform theirs that is.