Check on Modeled Returns for Apartment Property

10 Replies

Hello all,

I am currently modeling returns on an 8-unit apartment building. The property has been recently renovated and is for student rentals as they're single bedroom units.

I've yet to find a property worth pursuing based on my investment profile and have spent a lot of time learning about real estate investing from an investor's perspective. However, I'd like to get input on the numbers I've come out with and what everyone's general thoughts. The basic information is below and comes from owner-supplied rent roll and 2017 figures:

Listed Price: $339,000

Gross Rent: $47,520 ($495/month per unit)

Taxes: $1,506

Trash: $666

Utilities: $6,406

Cable: $1,982

Maintenance/Repair: $4,673

Insurance was not listed in the numbers given, so I estimated insurance to be around $1,617 based on 0.003% of property value plus $75 per door. I also applied a vacancy rate of 12%, which I believe to be somewhat conservative given this is student housing near a university which provides for a stable cycle of tenants. The below numbers will give my calculations, and for debt service, I'm assuming 80% LTV, 5% interest, and 30-year amortization (I understand these terms are possible to find even for multifamily).

Gross Rents: $47,520

Less 12% Vacancy: -$5,702

Net Rent: $41,818

Less Op. Exp.: -$13,727

Less Taxes: -$1,506

Less Insurance: -$1,617

NOI: $24,968

Less Debt Service: - $17,470

Cash Flow: $7,497

Now, based on these numbers and 20% down, I'm calculating around an 11% cash on cash and a 7.4 cap rate. Overall, this seems like a significantly overpriced property, one which I would likely need to bring the purchase price down to closer to $280,000 for this property to make sense with a 19% cash on cash and 8.9 cap rate. 

Would love to hear general thoughts on the numbers, modeled returns, and my general aim for a cash on cash return above 15% in a multifamily property. Thank you for your time.

Zach

$495/mo rent indicates low quality area and low quality tenants who are willing to live there. 

You did not budget anything for property management and turnover costs. I also see no upfront CapEx, no capital reserves, and no closing costs.

@Zach Bollman I am not sure of UK prices but both tax and insurance cost seem low to me and I live in an area of the US with super cheap property taxes.

Rents of $495 seem super low as well especially for a student rental area. This may be a great opportunity to raise rents though.

@Nick B. I'm not sure I would consider $495/month rent for a single bedroom apartment in a college town to be low-quality area/tenants. That's actually more than I paid for a nice apartment in college in a very nice area. But again, we're not talking about a complex in Denver, Chicago, or any other major market that has significantly higher rents. However, I may define low-quality area/tenants differently...

Property management isn't included in the above numbers but has been included in the actual model. The above numbers are based on self-managing. Including a 10% gross rents property management expense, the cash on cash drops to 4%. In hindsight, assuming self-managing is probably a terrible idea as it hamstrings the ability to focus on other properties or investments should opportunities arise.

The apartments were recently renovated, so my plan was to divert cash flow into a capital reserve over the first two-three years. There's enough personal liquid capital floating around to cover any costs and reimburse from cash-flow if necessary. Additionally, the maintenance/repair includes a partial remodel of four units. As a result, I didn't include a separate CapEx expenditure as my belief is the $4,673 maintenance/repair item would act as a method of capturing CapEx, capital reserve building going forward, and turnover costs. However, based on your response I'm thinking that's a pretty poor idea.

Based on your experience, how would you factor additional CapEx, capital reserves, and turnover?

Again, I'm completely new to this game so any and all advice, commentary, criticism, etc. is greatly appreciated. The above numbers are for a rough calculation to see whether this property is even worth pursuing (investigating the actual expenses constituting the $4,673, etc.). Overall, the property seems heavily overpriced. Thank you for your time.

Zach

@Aaron Linden The property is in the midwest, and I am from the area. I'm temporarily in the U.K.

As for insurance and taxes, the insurance is an estimate based on what I found digging around online since to insurance expense was included in the 2017 expenses for the property. Taxes have been confirmed to be accurate.

$495 seems low for a single-bedroom rental? I believed that to be normal, but I guess I'll have to take a look at comps for the area to see whether it's below market or just in a terrible area as @Nick B. mentioned.

Thanks for the reply!

Edit: Checked comps for the area and $495 for a one-bedroom unit is pretty much on par with the market for the area around the university.

@Zach Bollman ,

You did not mention the exact location in your original post and some expenses are location-specific.

Here are a few additional thoughts:

  • CapEx reserves are usually set to $250-300/year/unit for large properties. For a small one I would do a detailed assessment of the immediate repairs and of things that may break in the near future. E.g., if you have 20 y.o A/C units chances are you need to budget replace them in the first year. On the other hand, if they are only 15 years old you may spread that cost over the next 5 years.
  • Turnover costs really depend on the tenant quality and the length of time they stay. With students you have high maintenance tenants and constant turnover. I would ask owners of similar properties in the area about their turnover costs.
  • Another thing to consider with students, they usually come and go at the same time of a year. So, not only do you have high turnover but it also happens in a short time frame.
  • Did I say students are high maintenance? Here is a good example: https://www.dallasnews.com/news/denton/2017/11/12/... 

Nick

@Zach Bollman , regardless if the property is in a 'good' area if it only rents for $495 then the problem is some costs are fixed. Replacing a refrigerator won't be any cheaper there just because the rents are cheaper. So it will end up costing 2 months of rent vs half a month of rent in another market where rents are $1000. 

@Zach Bollman this thread may be helpful Nearing 1,000 Students. Not so much from financial modeling but from a boots on the ground standpoint. It's been my experience that the student rental niche has amazing financials and equally amazing headaches. 

I have had properties that have gone 6-7 years without a day of vacancy. But the maintenance and energy level required is so much higher than other niches.

Student rental profits and headaches are high. Turnover costs can eat you up with property management taking a months rent for placement. It will likely happen every year for every unit. Also consider other typical college shenanigans. 1 BR’s might be less of an issue though since there should be less kids per unit.