Feedback on Deal Analysis

[Greg L.]

I have an offer on a multi with two 2 bedroom apartments and 4 rooms.  The building is empty due to management issues with the owner and is in fairly decent shape except for one apartment that will need some cosmetic work.  My inspector will confirm all of that shortly but I know I'm going to need to do a few things to get a Certificate of Occupancy.  So upon closing, the building may remain empty for 1-2 months while I do the repairs and put in a laundry, so these numbers are projected based on my knowledge of the rents in the area:

Annual Rent Two 2 Bedroom Apts                   $ 18,600 

Annual Rent for 4 Rooms                                    26,260

Projected Laundry Revenues                                4,200

Total Rents                                                        $ 49,060

Expenses:

1.  Taxes                                                               4,088
2. Water and Sewer                                              1,600
3. Insurance                                                          1,600
4. Vacancy & Credit Loss (6%)                             2,944
5. Repair Reserve (10%)                                       4,906
6. Electric                                                               1,800
7. Trash                                                                      840

           Total Expense                                                      17,778

           Net income                                                          31,282  

          Purchase Price                                                   134,250

          Cap Rate                                                               23.30%

          Cash on Cash Return After Mortgage                   91.17%

I'm always cautious in thinking something is a slam dunk and there will be some challenges managing the rooms, but there are only 4 of them.  Is this as good of a deal as I think it is?  

[Victor Menasce]

I'm a developer in Philadelphia and have built numerous buildings just North of the Fairmount district. In my experience, you'll need to update the property to modern finishes and amenities to command top rents in the market. I have no idea on the condition of your property, but a distressed property that won't pass inspection probably needs much more than $20,000. There will be years of deferred maintenance in places that you may not see at first. Bring an experienced eye to inspect the property.

In terms of operating costs, will tenants pay utilities? Electric heat can easily be $500 a month during the coldest months. 

Finally, is the building a legal duplex? You need to check with the city to ensure permits were pulled for any previous renovations. Will it pass fire code, and sprinkler pressure tests, monitored fire alarm, etc?