First Apartment Analysis - What Am I Missing?

Multi-Family and Apartment Investing
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First Apartment Analysis - What Am I Missing?

Ryan York
Investor · Harrison Township, MI · Member since 2015 · 131 posts · 45 votes

Hey all!

Happy Monday.

My partner and I have been looking into apartments for a little while now, and we think we've finally come across a deal that works for us.

The complex is 8 units. Currently only one unit is rented out. Three units aren't in bad shape and can be rented out basically immediately with some very basic cosmetic work. We plan to rehab the remaining 5 units over the next 5 months.

Our plan is to rehab the units, get them rented out, and refinance out as much cash as possible as soon as possible. I'm planning for 3 years.

I've attached some PDFs below including our repair costs and analysis on returns. We feel like it's a good opportunity. Which leads me to the all important question, what am I missing? I'll bullet point some numbers below.

Purchase Price: 230k (cash only per the seller)

Rehab: 98k

Gross Rent After Rehab: 5600

Estimated Cash Flow After All Expenses: 12,278 annually

Estimated NOI After Rehab: 33,560 (including vacancy, all expenses)

Estimated ARV based on 10% cap rate in 3 years: 335,600

Post Rehab:

We'd refi and pull out roughly 268k (80% of our estimated 335k valuation), leaving us with about 60k in the property and a payment of $1,773 at 5% interest and 20 year term.

We realize the ARV isn't stellar in relation to what we'd have in it. I have a few reasons to believe it's still a good deal for us. First, most sold apartments in the area are closer to 9-9.5% cap rates. I'm just being conservative there. Second, we really like the area. It's currently probably a C area now, but it has all the makings for turning into the next popular little "main street" hang out spot. Lastly, the cash flow on this would be very good. I'm seeing over 20% cash on cash returns with all expenses included.

If we're even a little bit right about the area, and it went to say, an 8% cap rate, we'd be sitting pretty. If the market tanked, rent would have to drop 30-40% for us to start cash flowing negative. Assuming that didn't happen, we could easily hold the property until it rebounds.

Are we being blinded by the cash flow returns? Is the ARV too tight with the repair costs? What else?

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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
8y

It doesn't matter what they are asking. There is only one unit producing income. You cannot value the property based on projections. You should value the property based on how much income it has produced in the past 12-24 months. You said you would buy it for 230K and put another 100K in rehab costs. That is 330K. Then your projection in 3 years is that it will be worth $335K? So it only increases $5,000 in 3 years after spending $100K? C area, 10 Cap? You are speculating Sir, not investing.

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  • Derek Gibbs
    Real Estate Investor · Ann Arbor, MI · Member since 2017 · 75 posts · 52 votes
    8y

    Bummer, same thing just happened to me.

    I even went $5k over my high number just to try and make the deal happen and got out bid by $10k.

    I'm curious why so many are willing to throw piles of cash at anything right now. I hope I can take advantage when they get foreclosed on.

    Best of luck with the next one!

    0Reply
  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Ryan York I am curious what your plan of action is now that you have received some input from this panel of experts. Will you stick to your original plan, alter the plan, or scrap the idea and find something else?

    0Reply
  • Ryan York
    OP
    Investor · Harrison Township, MI · Member since 2015 · 131 posts · 45 votes
    8y

    @Anthony Dooley The seller accepted another offer so I will be scrapping the plan! However, it was good to hear input from so many, especially in the other direction. We will definitely consider these thoughts as we continue our search.

    0Reply
  • Spencer Gray
    Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes
    8y

    Way too much risk for the reward. If you have to do a rehab and a full lease up I would not do it unless I could take most, if not all, of my cash out within 12-16 mo and then see at least 8% cash on cash after the refi. 

    You can put your money into a syndication (with an operator with a solid and seasoned team) of a stabilized, cash flowing asset (200+ units) in a B area and be earning 8-12% cash on cash year 1 without ever meeting with a contractor, tenant, pay bills, etc. For all the work you are about to do, and the risk, why? Are you doing it just to do it or are you looking at it strictly s an investment to make money/build wealth? 

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  • Ryan York
    OP
    Investor · Harrison Township, MI · Member since 2015 · 131 posts · 45 votes
    8y

    @Spencer Gray I'm beating those numbers significantly. I'm not sure if you were able to see my numbers. I just realized how bad the quality is on my spreadsheet. Sorry about that! We would've been able to pull out 70-80% of our cash (depending on the bank and the cap rate) and we'd be pulling in over 20% CoC AFTER the refi. My timeline of 2-3 years is rough as I've never done it before, so that could be better I suppose. What am I missing there?

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