Found What I thought Was a Deal But,...

[Derek Gibbs]

I found a very nice C class building with 10 units near me that seems like a great deal on the surface. If you use the 50% rule, the numbers are great. However, I have a list of expenses from the owner that total 65%. At that number, it's not really a deal. I would have to put a lot more down and low ball the owner to make it work. From what I've read here the 50% rule is almost matter of fact. Should I count on 50%? The rents are $200-$250 below market but you can't raise them to market rates all at once. My plan is $50/yr. 

Below is the analysis at the lowball offer. They are asking $335k.  Thanks for any help you can offer.

[Stephen Swiatek]

@Derek Gibbs Are the numbers you posted below from the current owner? If so, I'm seeing the expense ratio to be 53.27% and not 65%...$5,020 gross rents @ 5% vacancy = $4,769/mo w/ expenses of $2,540.67. I took the vacancy from the income side and backed it off the expenses. If these numbers are how the property is currently performing then it's real close to 50% exp ratio. Taxes do seem high but then again I live in CO where the taxes are crazy low compared to the rest of the US...

Also, I don't know what the cap rates are going for a class C building in Ann Arbor but it appears they have this one listed at an 8 cap if the numbers you gave are their numbers...while you want to purchase at a 9.38 cap. If it's 8% for this property class then you may have a hard time going in at your cap if they know what they are doing.

As @David Wright mentioned, I would go with a longer amortization period like 25-30yrs which will increase your cashflow as well as looking for a better rate than 6.5% which will also increase monthly cashflow.

I agree with what @David Wright & @William C. mentioned in that you can get your units up to market rent quicker than $50/yr but of course this would require either the current residents to accept the full rental increase to market with their new lease or getting new residents to replace the ones who don't accept the increase. This goes without saying that you'll have to abide by the current lease amounts until they expire.

With this said, if the numbers are a good representation of the property and area and the cap rates for this type of building are around an 8 then the $335k list price seems reasonable. If you were to purchase at list and put 30% down with a 30yr amort. and 5.5% rate you would have at least 8% CoC return. If you were to get all the units up to market without having to put more than the $5k you have listed it would turn into a 15% CoC return and a value of $470k at an 8 cap.

Hope this helps!

Stephen