Hello everyone, I am currently in the process of learning about commercial investing (apartments) and I wanted to get some feedback regarding one the deals that has been brought to me to try and understand if this makes sense to buy.
Here are some of the numbers:
Annual expenses: $61,376
Annual rents: $157,500
Any advice would be greatly appreciated. Thank you.
@Kavon Hunter I guess it makes sense to buy? It's hard to give any constructive feedback with only what's provided. My advice would be to plug all of the information that you have into the BP calculator and post whatever it churns out as a result.
That’s a 14% cap rate. Really high for most markets unless it’s a D class property. I’d be suspicious
National studies put the expense ratio of multi-family properties at 45%, meaning, for every $1 you pull in, 45 cents goes to cover expenses, not including debt service. Your numbers are at 39%, so I'd say you're in the ballpark.
But your numbers put the cap rate at over 14%, which is incredibly high. So that makes me think this is a very deep value play with an expensive rehab, low occupancy, both, or just a screaming deal.
But as Andrew said, what you've shared doesn't give us much to go on. What are the value play options? How many doors is it? What class?
That aside, just from the numbers you shared and a 14% cap rate, that'd get me excited.
I appreciate everyone taking the time to respond. But to provide a little more information, it's full occupancy, could use some very minor work. But as far as value adds, I could add washer/ dryer, more efficient lighting, maybe pet fees? Any other suggestions?
What class is it? I would suspect it’s a D class property at best with that cap rate
Typical expenses on older buildings (I would suspect this is one) would be 50-60% of the income. You are in NJ, so the heat bill will be expensive and if you pay heat as the landlord, then you will be closer to the 60% mark. Do you know if these are real numbers or just pro-forma? Ask the broker for a T-12 (trailing 12 month profit and loss) and the current rent roll. Also, what condition is the property in and what is the location?
Alright I have the current rent roll, I believe it is class c, and I should be able to get the T-12 tomorrow. But the property is in downtown Harrisburg, in a pretty good location in the city.
@Kavon Hunter The reason I’m saying to plug the information into a calculator is you figure out pretty quick if you’re missing categories. With a 14-cap it’s usually a dicey part of town so you might find that collected rents don’t match up with gross projected rents. Not to mention that if you don’t have 95%+ occupancy it really throws off those T12 expenses (like utilities).
But let’s assume that it’s in a C-area and has great occupancy. What could make it a 14-cap? Well it could boil down to things like a roof, HVAC, and shared parking coming towards end-of-life. Then you don’t need 25% of $650K to buy you really need $163K + $200K for pending cap-ex items.
I’m making up numbers but one “fun” thing about commerical properties is all of those big ticket items are REALLY big tickets.
Which is also why it’s such a challenge for anyone to seriously evaluate your deal with such limited information.
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