18 Unit Apartment Complex Analysis HELP!

27 Replies

BiggerPockets Community I NEED YOUR HELP.

So I am looking at this 18 unit apartment complex to buy as my first deal. I know it's a huge jump but I am diving head first into this investing stuff and just realized how much I still have to learn just by talking to the gentleman who is selling the property who was just blowing me away with knowledge and could sense my inexperience over the phone (He does own 5 apartment buildings so maybe one day I can work from him and pick his brain.) Anyhow I am up for the challenge.

So enough about me and on to the property information:

Asking Price= $1,500,000

Recently renovated with:

New 30 year shingle roof

New Pex Plumbing

Updated wiring

Thermal Windows

2018 2 Ton HVACs

Brand new appliances in all units including washer & dryer

Granite Counter tops in Kitchen and Bathroom

18 units each 2 bed/ 1 bath, 795 square feet

They are estimating each unit will rent for $800/month.

Here are my number I have worked:

Annual income at full occupancy= $172,800

Annual Property Taxes= -$1,416

Annual Insurance= -$5,000 (the owner of the property said this was his best guess)

Annual Property Managment at 10%= -$17,280

Annual Maintenance/Cap Ex at 20%= -$34,560

Annual Vacancy at 5%= -$8,640

Annual Landscaping costs= -$1,800 (current owners rate)

Total Annual expenses= -$68,696

NOI: $172,800- $68,696= $104,104 before mortgage.

GRM: 8.6

Cap Rate: 6.9%

Based on this information it seems like a decent deal I am just lost about finding a commercial loan and where to even start in this process. I would love to find a limited partner with the money and experience who will allow me to do all the leg work and just answer my questions along the way. What are your thoughts and tips BiggerPockets? Where do I start?

I forgot to mention the property is currently vacant and he just received approval to start letting people move in after the renovation. Said it would be about a month before the first tenant moves in and that will increase the price once cash flow is started.

I would try to stretch out the closing to get the property 100% full. Put it in your feasibility period.
It will also help you to know if the current owner has over renovated the property for the area.

I don’t know anything about CAP rates over there but the property seems pretty turn key. 7% where I am at is good but I have no clue in SC.

Property taxes and insurance seem light. 

I would also add a reserve figure as you will need to set aside cash for future maintenance (not sure if included in your 20% CapEx figure).

Should also include utility costs for common area, exterior lighting, etc. Do tenants pay all utilities?

I would also ask for a copy of the environmental report or property condition report which I would assume were done before the rehab. 

Also why doesn't he wait to sell for a higher price once tenants move in and the property is cash flowing? 

Not saying to run away or it's necessarily a bad deal, but I think your NOI is going to be dinged a bit when you add in more expenses.

Property taxes seem really light. 

Applause for how to get started in REI! Exciting! Sounds like a good find. If it were me I would look for a building that was like this one probably was prior to the renovations-that would be the opportunity! Some of the prices like insurance and tax are low, allow for CAPEX and mtce. Be sure to get a professional inspection.

IMO the price reflects an occupied building and he is applying some salesmanship with the 'I'm raising the price'  tactic, 

The seller has done a good job of forced appreciation here and might be a member of this forum?

Thanks for the replies! I will double check my property taxes and make sure I’m looking at the right thing.

The tenants do pay utilities but I did not think about the exterior lighting so I will definitely add that! The 20% for Maintenance and Cap Ex is 10% for each I just lumped them together.

And yea he did do a great value add. According to the county he bought the property for $230,000 in November of last year so he is just flipping it. 

Not knowing the location @Kristopher Edwards is making it hard to comment. 

what is the supply and demand situation in that market?

how big is the town is it growing?

Like mentioned above, it sound like Turn key, you will need to get it to 80%-90% occupancy before you can get proper financing on it. 

Make sure you verify his scope of work and that everything that needs Code got ticked off by the City. this is massive price different and if he got the deal that cheap it could have been that there were major structural issues. --- Check it out!

Verify the Taxes with the assessor, what would Taxes be AFTER You Buy it for 1million+.

this could jump up and kill the deal.

Get  independent Rental appraisal from local property manager. and look on apartments.com  who are your competitive in the market? what they offer? 

Work your numbers on median rent not top end rents in the market.

6.9% could be good for good / large market but crap for small town where you can buy for 9%!!  Do your homework and verify everything within Due Diligence time frame.

Good luck, H.

@Kristopher Edwards great starting property!

The annual property taxes seem very low in my opinion. I would check that out.

I would also check when the owner bought it and for how much. It may give you an idea of how much room he has to come down for your offer. It sounds like he's trying to flip this. 

I would also speak with local property managers to get a gauge of how long it should take to get to full occupancy. It could be several months of holding costs before the property is performing at 6.9% CAP.

Guys this information is great lots of great stuff I didn’t think of like checking with property management companies about occupancy! Thanks so much!

@Kristopher Edwards The property tax amount may be right for the property before it was renovated. Look it up with the county to see what the basis is. You can call the county to find out if you purchased for $1.5mm what the taxes would be. Every are is taxed different, but I would expect the property taxes to be at least $10k, but closer to $15k+/year. 

Other costs that are missing: utilities, advertising, attorney fees (evictions), accounting fees (books and taxes), advertising costs, leasing fees (if you need to lease 18 units), extermination contract, licensing fees if applicable. 

Is there laundry or any other income? 

You are buying this based on what could be at a very steep price. I would either buy much lower or have the contract state a certain occupancy in order to close. 

This might not be the conventional method. This seller is savvy, probably has a solid network and seems to like you, based on the description of your rapport in the opening post. Suggest to him you will do his deal (you pick the number) and sign an offer contingent upon financing and inspection, he helps you raise the money. He brings you to the lender, makes the intros and helps you establish value. The lender will do their due diligence; but he will have helped with some credibility. Can you see the seller contributing in this role with you?

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Hi, there are a few points you might want to look into/ask:

Does CAP rate reflect only a 5% vacancy? Because you mentioned it currently has 0% occupancy. So from the looks of it, this isn't reflective of the current value.

Also, call around to other apartment complexes in the area and call posing as a renter. Ask if there are units available, ask how many units are available because it might take a while for you to move. (The purpose is to see what occupancy is in the area)

The occupancy is the biggest red flag (IMO). The seller wouldn't have to advertise, you would. In order to get the complex stabilized (at 95% occupancy), how long will that take? The NOI and CAP rate the seller gave you might reflect a property that may already be 95% occupied, not 100% vacant.

In the ‘appraisal world’ this is the difference between an ‘As Complete’ value and a ‘Stabilized’ value. Big difference.

Good luck though. It’s exciting to get into this investment world but don’t let a fixed up vacant complex deter you from your own due diligence vs. just listening to the seller.

Property tax seems way too low. Where did you get this number?

Try to buy enough units to hire a property management company and you need to own a minimum of 28 to 30 units to afford one.  If they are experienced they can save you money on maintenance if they manage several properties.  That way you can work on income production and not bury you with maintenance requests.  You might ought to look at a complex that has immediate positive cash flow.  Having a property management firm could relive you from being tied up to manage and do maintenance work.  It will probably take equal expense to run 30 units versus 18.  If you are just starting you might have some trouble with a totally vacant complex that could cost you money.  You might want to listen to Grant Cardone on YouTube who has many videos there and can provide you very much information about owning apartments. He currently owns over 4,000 apartment units.  He may seem kind of pushy but he has much information about apartment owning that he has been doing for about 25 years.  He uses property management companies to run all of his places so he does not have to deal with that.  Immediate positive cash flow is one of his requirements.  He has many things that you should think about and possibly do.  He has been on BP Podcast and knows what you should do to make money.  I do not know what you need help in but I would be happy to help you if you think I could help.  I do have about 30 years of construction management experience and I carried a real estate brokerage license for about 30 years.    I'm 61 years old now and I have much experience in the Dallas, Texas area where I grew up.  If you want to contact me you can use BP since I am on here just about everyday.  Best of luck to you!

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@Kristopher Edwards , basically, the owner does not seem highly motivated to sell. ie. The (eventual) sale price will reflect the maximum the market will bear, whether now or later. (Even better if a sucker-buyer buys into hyperbole, thus over-paying)! My guess is that it's probably cost the Seller less than $1M to get this far with it, so he might be saying to himself: If I can get a quick half mill profit now without spending more to continue value-adding, why not?

I liked Lance's "I smell a rat" comment, which in my mind is confirmed by the Seller's willingness to let you believe in overly-optimistic pro forma numbers, such as low property tax figures!

[I hope I'm exaggerating, but, it's to make a point]. Good luck...

I received the property taxes from the county website. I am going to look and make sure I got the right page. I do believe it may be like @Todd Dexheimer that the taxes are from when he purchased the property last November for $230k. 

I was definitely planning on using a property management company for sure. 

Once again, thank you for all the insight!

Originally posted by @Kristopher Edwards :

I received the property taxes from the county website. I am going to look and make sure I got the right page. I do believe it may be like @Todd Dexheimer that the taxes are from when he purchased the property last November for $230k. 

 That's what I'd be looking to buy. Not after the value add.

You are getting great information here! I agree on taxes very light and may be based on his purchase price.
My question is - have you seen the property?

Will you have to pay lease fees for every tenant placed?

What all do lease fees include? Is this like the background and credit check? If so I was gonna require an application fee for the tenant to pay.

@Kristopher Edwards Often times on BP we get post like yours that are such terrible deals, yet the BP community doesn't want to discourage anyone from pursuing their dreams so we point out subtle things about the deal or the buyer in hopes they'll pickup on the clues without being told you need to just Stop and find an actual good deal. Unless this property is a block away from the beach in CA, you will not have this property stabilized fast enough not to take a loss on year one. The fact that your basic questions about things like lease fees, common area utilities, you're factoring a property at 100% when all properties will have vacancy in year one unless you're telling me all 18 units will be leased in prior to closing. This also tells me that you have not done an IRR on this property. Without listing 100 things wrong here, I'm just going to say, get a little more education on REI, and not from the guy selling you the asset before you commit to properties. This is a terrible deal.

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