Help Me Analyze this Apartment

7 Replies

I know the owner of a 12 unit apartment and have approached him about selling it to me. Would love it if anyone would help me with what they think it's worth. Here are the details:

Where: Toledo, OH (near University of Toledo)
Rent Class: I would classify it as a C- to D+ area
Size: 8832 Sq Ft

Year Built: 1968


Rents at 100% Occupancy: $58,500 (7 1BRs at $375/month and 5 2 BRs at $450/month).

2017 Rents: $57,416

2017 Gas Exp: $6034 (Boiler heating, paid my landlord)

2017 Electric: $1486 (For hallways/common area)

2017 Water: $4374 (Not sub-metered, paid by landlord)

2017 Trash: $1600

2017 Real Estate Taxes: $5900

2018 Insurance : $2600

Other Info:

- The University now requires 2nd year students to live on campus (previous just Freshmen did) so this has pushed down student rents for the area.

-It is a low rent area. I think rents may be $50-$100/month under market after factoring in the landlord paying water and gas. It is difficult to compare newer/better apartments in the area vs this one so I could be wrong on this.

-Boiler heating is original to the property so this is a potentially large expense.

-Large cap-ex for updating electrical which reduced insurance to $2600 for 2018.

-2 units are renovated pretty nicely but I'm guessing the rest are in rough shape.

-I do have a property manager with experience who I believe can manage the property better however I don't know if the market will allow higher rents with improvements. I currently have 4 single family rentals so this would be my first apartment.

-I have a good relationship with the property owner and could potentially get seller financing on the down payment and do commercial financing for the rest.

Questions I have:

-What should I use as a conservative expense ratio for an older/lower rent apartments like this? What should the NOI be on this?

-How would you estimate potential for rent increases? My property manager has given me an estimate. I've looked at rents in the area but other apartments are in better condition and better locations and I'm unsure how much to adjust for these differences.

-What would you estimate for a purchase price?

Let me know any questions you have and I'll try to answer as best as I can. Thanks in advance!

If this is a C- or D+ area, then I would run, but that is me. 

Economic vacancy will be really high due to the type of area. I would count on at least 10% for that if not much more. The other item that will be much higher that expected is the maintenance and repairs. Personally I would budget closer to 15% on this as well. 

This is a guess without knowing the Profit and loss statements over the past 2 years, but I would expect 60%+ in expenses. If you can get more detail on his expenses and what your management company would charge that would help. As for what you should pay. I don't know Toledo, but I would expect their C-/D+ would trade above an 8 cap - maybe closer to 10 cap

With a BIG caveat that it's tough to answer any of these questions without knowing more about the property / area:

-What should I use as a conservative expense ratio for an older/lower rent apartments like this? What should the NOI be on this?

I'd say you'll be in the 55-60% range. Have you tried networking or cold calling other owners or property managers in the area to ask them what they're running at?

-How would you estimate potential for rent increases? My property manager has given me an estimate. I've looked at rents in the area but other apartments are in better condition and better locations and I'm unsure how much to adjust for these differences.

Under estimate rent increases and over estimate vacancy. Especially during your first year or two, more people than you expect are going to leave once ownership changes. This was one of the first things I learned that I never read in any book or forum post when I bought my first building. On one hand - probably a good thing as you can get more units turned over... just make sure you have enough set aside for capex and be careful not to over-renovate based on your area. 

-What would you estimate for a purchase price?

You'll want to talk to a broker on this one, but this sounds like something you'd want to get at least a 13-14 cap on. It's going to look a lot better on paper than reality. 

One more piece of caution - have you started speaking to lenders? Most will have 'all-in' leverage limits so your plan of combining seller financing w/ a commercial loan will only work up until a certain point (unless your friend would do an unsecured loan or something off the books)

Originally posted by @Drew Steinman :

I know the owner of a 12 unit apartment and have approached him about selling it to me. Would love it if anyone would help me with what they think it's worth. Here are the details:

Where: Toledo, OH (near University of Toledo)
Rent Class: I would classify it as a C- to D+ area
Size: 8832 Sq Ft

Year Built: 1968


Rents at 100% Occupancy: $58,500 (7 1BRs at $375/month and 5 2 BRs at $450/month).

2017 Rents: $57,416

2017 Gas Exp: $6034 (Boiler heating, paid my landlord)

2017 Electric: $1486 (For hallways/common area)

2017 Water: $4374 (Not sub-metered, paid by landlord)

2017 Trash: $1600

2017 Real Estate Taxes: $5900

2018 Insurance : $2600

Other Info:

- The University now requires 2nd year students to live on campus (previous just Freshmen did) so this has pushed down student rents for the area.

-It is a low rent area. I think rents may be $50-$100/month under market after factoring in the landlord paying water and gas. It is difficult to compare newer/better apartments in the area vs this one so I could be wrong on this.

-Boiler heating is original to the property so this is a potentially large expense.

-Large cap-ex for updating electrical which reduced insurance to $2600 for 2018.

-2 units are renovated pretty nicely but I'm guessing the rest are in rough shape.

-I do have a property manager with experience who I believe can manage the property better however I don't know if the market will allow higher rents with improvements. I currently have 4 single family rentals so this would be my first apartment.

-I have a good relationship with the property owner and could potentially get seller financing on the down payment and do commercial financing for the rest.

Questions I have:

-What should I use as a conservative expense ratio for an older/lower rent apartments like this? What should the NOI be on this?

-How would you estimate potential for rent increases? My property manager has given me an estimate. I've looked at rents in the area but other apartments are in better condition and better locations and I'm unsure how much to adjust for these differences.

-What would you estimate for a purchase price?

Let me know any questions you have and I'll try to answer as best as I can. Thanks in advance!

I wouldn't buy at 100% occupancy unless rents are very low and you can buy dirt cheap

Always buy distressed and put in some hard work to maximize the investment

Just my opinion

Thanks

Originally posted by @Todd Dexheimer :

If this is a C- or D+ area, then I would run, but that is me. 

Economic vacancy will be really high due to the type of area. I would count on at least 10% for that if not much more. The other item that will be much higher that expected is the maintenance and repairs. Personally I would budget closer to 15% on this as well. 

This is a guess without knowing the Profit and loss statements over the past 2 years, but I would expect 60%+ in expenses. If you can get more detail on his expenses and what your management company would charge that would help. As for what you should pay. I don't know Toledo, but I would expect their C-/D+ would trade above an 8 cap - maybe closer to 10 cap

More like a 12-14 cap in Toledo for C class.

Toughest part about our market here is property management

They are all extremely bad 

@Drew Steinman . Congrats on finding the property. A couple of words of caution based on my experience finding deals in C-, D class properties. Even if you invest lots of money to fix it up, Property Management companies don't closely manage these types of properties like they should because the rents are too low and it is not really worth their while. So, you will need to a very hands on owner. Additionally, if the place is 100% occupied and there is lots of deferred maintenance and little room for rent increase, then your best strategy is to pay as little as possible for this property. Because of the classification, you should expect evictions and other types of issues you will need to have spend time managing..

Good luck.

(919) 434-3132

Drew, I've owned lots of apartments in the area you are referring (2289 Upton, 2445 W. Bancroft, 2155 Perth to name a few....sold them a couple years ago), so I'm very familiar with the area.

My experience is with paid heat, and self-managing, you can expect a 60% expense ratio. But the good news with this building is if the electric has been upgraded you can switch to electric baseboard heat. That is a huge plus. Those old boilers and boiler systems are a pain in the a$$...lots of service calls because of air in the system, pumps going bad, etc. And if the boiler goes down it's a major deal...no heat to the entire building. If one baseboard goes down it's no big deal...no heat to one room.

The rents seem low. I was getting $475 for one bedrooms and $575 for two bedrooms at the above mentioned buildings.

Everything else seems in line. Beware the taxes as the tax value of the building will change when you buy it. So if you pay more than the current tax value, your taxes will go up accordingly.

Without looking at the building, my initial back of the envelope would be $195,000. That's $58,500 x .4 / 12% cap rate. But that is subject to a much deeper analysis and walk through of the building.

Thanks everyone for the input! This is all very helpful.

@Engelo Rumora  I definitely see your point. I have not considered distressed since this would be my first multifamily deal. Sometimes being "conservative" can be more risky in reality so perhaps I need to change my thinking on this. I would likely need some outside money on a distressed deal and I feel like I shouldn't ask for outside money until I'm done at least 1 multifamily deal.

@Ryan Pyle . Yes, the boiler system is a huge concern. I had not thought about electric baseboard heat so that's extremely helpful. 

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