What is a good offer for this Apartment building?

8 Replies

I'm considering making an offer on a 17 unit apartment building in the southern suburbs of Minneapolis/St. Paul, MN.

Here are the summarized numbers from the owner: He keeps very precise track of all of the apartments expenses and incomes so I take them at face value. 

Annual Income 2017: $143,000 (10 1bd/1ba, 4 2bd/1ba, 3 studios and 15 stall garage)

Annual Expenses 2017: $68,000 (includes $21,000 in repairs/capital improvements, $4,600 in heat, $7,300 in insurance and $17,500 in real estate taxes. They do not include property management as he managed it himself.)

NOI: $75,000

The property is well taken care of with all major expenses taken care of within the last 10 years. Rents are at market rate. 

In my view, there is very little space for improving the operation and is a turnkey building.

The reason I am considering it is it's location is very convenient for me to manage, I know the area and am confident in the rental market there. It is not being marketed for sale to the general public, I only know about it because I happen to connect with the owner by chance.

What would a fair price be for this type of property and what kind of terms could I roughly expect from a commercial bank?

I'd appreciate any input anyone has on this. I am new to the apartment market. If there are any other numbers you'd like to know, just ask below.

Thank you. 

@David Stanford Good find! I do not know the building or the neighborhood or anything other than the numbers that were persented. Based on that I would say a 'fair' price would be 1 million. As to what terms and rates a bank will give you is really going to depend on how hard you work to get the best rate. Perhaps others will be more helpful in that area. Get a rent roll and actual financials, and have the building inspected by a professional inspector. Review the leases and have the financials checked out by your accountant. If he has been doing his own management make sure the leases stand up to your local laws. You can determine that by joining your state LL association and getting some help from them.

@David Stanford what's the going cap rate for that type of property in that area? That'll give you a very goo idea of its value. I have no experience in this arena but I would like to buy at an 8 CAP or better, so my max offer would be $925k, but I would probably offer more towards $750k

I'd start at 750k as well.  I don't like to go above a 9 cap, so my max would be around 850K.  I'd be doing a deep dive on the numbers and have a thorough inspection done.  

There seems to be some expenses missing. Is the water metered? House meter power/water? Is there an alarm/security system? Garbage pickup? Or is that in the gap between what you itemized and the 68?? I would need that broke out. What is the age of the boiler? Roof age?  You need to include management irregardless if they didn't. It isn't gonna manage itself.

All of those expenses you mentioned are in the $68,000. He used a care taker to manage the building, gave a rent discount to live in caretaker  Owner pays water/sewer, heat (central bowler replaced 2018) and garbage. Tenants pay electric. Windows and roof are in fair condition, 15ish years old. 

@David Stanford , in order to properly underwrite it the way a bank would, you should add a 7-8% property mgt fee and $250-350/door/yr for repair and maintenance.

Are these long-term tenants? What is the turnover? What does delinquency look like?

@David Stanford , one of the keys is going to be the amount of deferred maintenance, if any.  Also, you have to get a pretty good estimate for near term repairs and upgrades you'll need to maintain rent levels.  Look at the competition - are new apps being built that you'll have to compete with.

We are all optimistic that we can increase, or at worst maintain cash flow. But if major upgrades or repairs become necessary, and you don't have, or didn't create a depreciation reserve, the dream could easily turn into a nightmare.

Back in the lat 70s early 80s we used to count on inflation bailing us out - in a few years the property value would increase substantially and we could obtain a larger loan and pay for upgrades that way, but that really doesn't exist any more. Additionally, cap rates are likely to be increasing, thereby creating al least temporary losses when market to market for todays buyers.