Analyzing a 50-unit apartment- "The 1% Rule" ?
Specialist · Annandale, MN · Member since 2016 · 14 posts · 5 votes
I have an opportunity to purchase a 50 unit apartment, along with 7 other SFR properties (14 doors total for those) from a retired old-school RE investor. He keeps telling me that he used to buy his properties using the 1% rule, and wants to sell them as such. His explanation of the rule is: If gross monthly rent on SFR is $1,000 ~ House should sell for $100k. If his 7- unit brings in $5,000, he wants to sell it for $500,000, and since the 50 unit apartment brings in $28k gross rent a month, he wants to sell for $2.8 million. I'm in the process of analyzing the apartment financials to make him an offer. But I don't know enough on how to analyze apartments to counter and negotiate. Like I said, he's very old school, has no debt on all his properties, and I know him well enough to know he's not out to swindle me. I can analyze SFR all day long, but very green in the apartment arena. It was a 5 year goal to move in that direction, but this opportunity presented itself 4 years and 3 months early. Any suggestions for analyzing?
I can tell you that an apartment unless it's brand new in Alex is not worth a 6 cap. You're likely closer to an 8 cap on the market depending on the condition, age, location, etc. Also, Alexandria is a small city, so with a little downturn, high vacancy can occur. The last thing is the expenses can be 60%+ if it is a central boiler, especially a steam boiler.
Are you saying you recently bought an 80 unit apartment in Alexandria MN at that price? This would be a property in a similar condition not requiring rehab? The price per door will often vary per market.
The property required no rehab and was constructed in the 90's. The only issue that came up during inspection was two broken rafters, a couple disengaged shingles, a few holes in the vinyl siding, and cracks in the sidewalks. Total estimate to fix everything was about $5k. Property was 100% occupied at takeover and located near Charlotte, NC.
Interesting... for all we know, you may have overpaid for your property based on what the market rate is in NC. Some areas in MN price per door is between $70,000 to $75,000. That is within the state of MN. I included a map here just so maybe someone else can help count how many states exist between NC and MN :) Again, different markets have different prices and cap rates. In New York for instance, $400,000 to $500,000 per door or more is normal rate.
The property is currently performing at a 13.6 cap with rents 25% below market. Don't worry, I'm well aware of how many states exist between the two. I'm just not interested in paying 233% more per door when the rent rolls are the same. When I invest, I focus on cash flow. Paying under $15K per unit with rents averaging $400 a door is hard to beat. The per unit market price for this complex is $22K.
What kind of rent are you getting per door for $75K? By purchasing 80 units at $14.9K with an average rent of $400, I can purchase five units for $75k with a total rent of $2k. If you're paying $75k a door and bringing in more than $2k, my hat is off to you. I understand market prices vary, which is why certain markets are less financially advantageous. At the end of the day, you're buying a rent roll. This all comes down to math, right? I can't see why spending $2.8M for a productive asset in Alexandria that generates an equal return of a $1.19M productive asset in Charlotte is a better decision.
Are you saying you recently bought an 80 unit apartment in Alexandria MN at that price? This would be a property in a similar condition not requiring rehab? The price per door will often vary per market.
The property required no rehab and was constructed in the 90's. The only issue that came up during inspection was two broken rafters, a couple disengaged shingles, a few holes in the vinyl siding, and cracks in the sidewalks. Total estimate to fix everything was about $5k. Property was 100% occupied at takeover and located near Charlotte, NC.
Interesting... for all we know, you may have overpaid for your property based on what the market rate is in NC. Some areas in MN price per door is between $70,000 to $75,000. That is within the state of MN. I included a map here just so maybe someone else can help count how many states exist between NC and MN :) Again, different markets have different prices and cap rates. In New York for instance, $400,000 to $500,000 per door or more is normal rate.
The property is currently performing at a 13.6 cap with rents 25% below market. Don't worry, I'm well aware of how many states exist between the two. I'm just not interested in paying 233% more per door when the rent rolls are the same. When I invest, I focus on cash flow. Paying under $15K per unit with rents averaging $400 a door is hard to beat. The per unit market price for this complex is $22K.
What kind of rent are you getting per door for $75K? By purchasing 80 units at $14.9K with an average rent of $400, I can purchase five units for $75k with a total rent of $2k. If you're paying $75k a door and bringing in more than $2k, my hat is off to you. I understand market prices vary, which is why certain markets are less financially advantageous. At the end of the day, you're buying a rent roll. This all comes down to math, right? I can't see why spending $2.8M for a productive asset in Alexandria that generates an equal return of a $1.19M productive asset in Charlotte is a better decision.
If you are in rentals then the core objective always is cash flow. 13.6% cap rate is sort of high and usually is the case for a low C or D area. What is the vacancy rate? Is it an economically depressed area? What is tenant turnover like? Of course you are paying for cash flow but the certainty of the cash flow is also an issue.
Are you saying you recently bought an 80 unit apartment in Alexandria MN at that price? This would be a property in a similar condition not requiring rehab? The price per door will often vary per market.
The property required no rehab and was constructed in the 90's. The only issue that came up during inspection was two broken rafters, a couple disengaged shingles, a few holes in the vinyl siding, and cracks in the sidewalks. Total estimate to fix everything was about $5k. Property was 100% occupied at takeover and located near Charlotte, NC.
Interesting... for all we know, you may have overpaid for your property based on what the market rate is in NC. Some areas in MN price per door is between $70,000 to $75,000. That is within the state of MN. I included a map here just so maybe someone else can help count how many states exist between NC and MN :) Again, different markets have different prices and cap rates. In New York for instance, $400,000 to $500,000 per door or more is normal rate.
The property is currently performing at a 13.6 cap with rents 25% below market. Don't worry, I'm well aware of how many states exist between the two. I'm just not interested in paying 233% more per door when the rent rolls are the same. When I invest, I focus on cash flow. Paying under $15K per unit with rents averaging $400 a door is hard to beat. The per unit market price for this complex is $22K.
What kind of rent are you getting per door for $75K? By purchasing 80 units at $14.9K with an average rent of $400, I can purchase five units for $75k with a total rent of $2k. If you're paying $75k a door and bringing in more than $2k, my hat is off to you. I understand market prices vary, which is why certain markets are less financially advantageous. At the end of the day, you're buying a rent roll. This all comes down to math, right? I can't see why spending $2.8M for a productive asset in Alexandria that generates an equal return of a $1.19M productive asset in Charlotte is a better decision.
If you are in rentals then the core objective always is cash flow. 13.6% cap rate is sort of high and usually is the case for a low C or D area. What is the vacancy rate? Is it an economically depressed area? What is tenant turnover like? Of course you are paying for cash flow but the certainty of the cash flow is also an issue.
It's a class C area. It's not an economically depressed town, it's actually going through a mild boom. A private university just announced they're moving their masters in health sciences program three miles from my complex. This will bring 200 students to the community.
Vacancy rate has averaged 4% over the last three years. Turnover is minimal and my PM received 3-4 calls a week from prospective tenants wanting units. Only problem is I have no vacancies for them. Collections aren't an issue.
Still curious to know the rent you're getting for $75k a door.
I just love these old school guys that have been self-managing since Jesus was a boy.
I doubt he'll be swayed much by NOI and cap rate valuations. He's old school, remember? Yellow paper and pen. Phone books. Diners in the morning to discuss crops...
I like 1%ers in my area for houses. Mostly because the tenants carry the w/s/g costs. In multi's they don't. Those run about 7% for me, so I'd be at 93x monthly, all being equal. That he will understand and relate to more than market capitalization rates. Ask who pays the w/s/g.
Are you saying you recently bought an 80 unit apartment in Alexandria MN at that price? This would be a property in a similar condition not requiring rehab? The price per door will often vary per market.
The property required no rehab and was constructed in the 90's. The only issue that came up during inspection was two broken rafters, a couple disengaged shingles, a few holes in the vinyl siding, and cracks in the sidewalks. Total estimate to fix everything was about $5k. Property was 100% occupied at takeover and located near Charlotte, NC.
Interesting... for all we know, you may have overpaid for your property based on what the market rate is in NC. Some areas in MN price per door is between $70,000 to $75,000. That is within the state of MN. I included a map here just so maybe someone else can help count how many states exist between NC and MN :) Again, different markets have different prices and cap rates. In New York for instance, $400,000 to $500,000 per door or more is normal rate.
The property is currently performing at a 13.6 cap with rents 25% below market. Don't worry, I'm well aware of how many states exist between the two. I'm just not interested in paying 233% more per door when the rent rolls are the same. When I invest, I focus on cash flow. Paying under $15K per unit with rents averaging $400 a door is hard to beat. The per unit market price for this complex is $22K.
What kind of rent are you getting per door for $75K? By purchasing 80 units at $14.9K with an average rent of $400, I can purchase five units for $75k with a total rent of $2k. If you're paying $75k a door and bringing in more than $2k, my hat is off to you. I understand market prices vary, which is why certain markets are less financially advantageous. At the end of the day, you're buying a rent roll. This all comes down to math, right? I can't see why spending $2.8M for a productive asset in Alexandria that generates an equal return of a $1.19M productive asset in Charlotte is a better decision.
If you are in rentals then the core objective always is cash flow. 13.6% cap rate is sort of high and usually is the case for a low C or D area. What is the vacancy rate? Is it an economically depressed area? What is tenant turnover like? Of course you are paying for cash flow but the certainty of the cash flow is also an issue.
It's a class C area. It's not an economically depressed town, it's actually going through a mild boom. A private university just announced they're moving their masters in health sciences program three miles from my complex. This will bring 200 students to the community.
Vacancy rate has averaged 4% over the last three years. Turnover is minimal and my PM received 3-4 calls a week from prospective tenants wanting units. Only problem is I have no vacancies for them. Collections aren't an issue.
Still curious to know the rent you're getting for $75k a door.
You can easily look on loopnet if you had to, there are 2 multifamily with 5+ units within 15 miles of Minneapolis (as of this posting) -- both are currently selling at about $70,000 per door.
The 1% rule is commonly used to price real estate for sale in my area (Southern Indiana). I know from analyzing many properties that a property priced like that will almost never work for me as a rental, so I typically don't even consider them. What really matters (IMO) is what kind of return YOU want. You have to analyze the deal according to your standards and offer based on that. If his 1% price works for you, great. If not, you can try to negotiate. But remember your goals and don't accept a low return just to make the deal.
Alexandria, MN is a much different market @Account Closed than Minneapolis, MN area. More rural and helped by summer, lake season tourism. Kind of a regional center as county seat for that part of the state which helps. I think the broader question in these communities is how long-term is your holding period and the required returns you want to achieve? There are certainly better cash return deals in Alexandria on smaller projects. If the property is in excellent condition, then a premium is deserved but you may struggle with the property appraising out to support higher valuations. We have run into that on occasion.
Usually when I hear the word 'rural' when discussing an apartment location, that usually is another word for risk. Demand for rental housing in Minneapolis and occupancy rate would be different than Alexandria's.
1% rule of thumb is not so good. He leaves out expenses. Get the building expenses and model what you are really making: The "Net Operating Income."
Very little mention at this point regarding the 7 SFHs. Are they part of the total purchase price. If so you need to separate them off when calculating your offer. Apartments and SFHs are as different as busses and airplanes. Do not bundle them together in determining over all value.
Your best approach would be to not include the SFHs and tell him to sell them separately. If he will not do it then value them well below market, get rid of the tenants presently in them, and sell them at market to home buyers.
The SFHs are a negative not a positive and should be avoided or flipped to achieve some immediate return.
@Kyle R. you can't compare location when renting. The map above was quite helpful for me in determining the difference of MN and NC.
Sure you can get better cash flow numbers but most of them come with a downside. Most people who own proclaimed "C" properties really own "D" properties. Many "high cash flow" properties have high expense ratios or in some cases will never appreciate. Duluth MN for example - if you look hard enough you can usually find a Tri-plex or even a 4-plex for around $100k-$120k. It will be an old house, high utility cost (some on oil heat), and the prior owner likely bought it 10 years ago for the same price they are selling it at. The cash flow game is not enough for me to purchase a property in that area.
Another example would be north Minneapolis or Detroit. If you talk to the city you can probably pickup some houses for $10k but you sure won't want to drive down the street late at night!
He has to consider what the Alexandria cap rates are and start from there. It would make no sense to get a lower rate than he can get on a similar investment all things remaining equal. Buying in a different area is a separate decision by itself.
@Pete Edmonson - if you wanted to shoot over the financials I would be happy to analyze the deal for you, and then walk you through the process.
Happy Investing!
I don't know that market and am not going to comment on the price...
If he's older and owned forever; I would look into setting up a seller financing with little down on a longer term and something like a 5 year balloon. Pick favorable terms that allows you to make some decent returns during that time while adding all the value you can, increasing rents, etc and then refinance. If there's enough room to add value, it could be worth "overpaying" a little if it gets you the deal now with much less down on favorable terms.
@Kyle R. you can't compare location when renting. The map above was quite helpful for me in
Another example would be north Minneapolis or Detroit. If you talk to the city you can probably pickup some houses for $10k but you sure won't want to drive down the street late at night!
Maybe I'm just being green here but why wouldnt you want to drive down a street in Detroit at night? :-)
Hi Pete, I am also new at apartment complex investing. I am trying to run the number based on your deal just to educate myself on the subject. Your monthly payment is most likely going to be around $11k on the monthly mortgage alone. at 50% expenses you are at 14k, so you re projected to make $3k per month on a $200k investment( down payment)? Of course when the rent is raised you could get higher return but does that sound about right? I am looking into buying an apartment complex and still trying to understand it. Thank you so much for sharing your info.
It's a small world, I currently manage the properties discussed above. This is why I love BP, you get to talk about deals and properties regardless if they're across the country or across the street.