Advice on purchasing a multi unit apartment building in Maryland

Multi-Family and Apartment Investing
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Advice on purchasing a multi unit apartment building in Maryland

Demetris Moore
Member since 2019 · 6 posts · 0 votes

Hello, I have a question or I might just have the jitters.  I have purchase a few houses some I've flip and some I've help on to for about a year or two and I've money in the process.  My questions is  I am in the process of going through closing on a 7-unit one-bedroom apartment building in Maryland. The gross amount of rent is 4200/Mo

I am obtaining a mortgage for the total price of 389,900/ The annual expenses broken down below. This doesn’t seem like a large monthly cash flow  of 779.95 per month for a building that requires a down payment of 97k at closing. .My plan is to buy and hold and leave to my kids. Do you these numbers look like a good deal?

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Account Closed
Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
7y

Your kids will love you more if you put the 97k in an index fund for them

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    Impossible to say without knowing more specifics. If your NOI is as listed, and purchase price is listed, thats a 7.9% cap rate, which is on the higher side for much of Maryland. That cap rate suggests to me Baltimore, Eastern Shore, or Washington County heading west.

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  • Demetris Moore
    OP
    Member since 2019 · 6 posts · 0 votes
    7y

    Yes, it is in Hagerstown, Maryland.  You are saying this is a good return? I am thinking it would take years to make my downpayment back?

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  • Demetris Moore
    OP
    Member since 2019 · 6 posts · 0 votes
    7y

    Should I look at my cash flow from a different perspective?

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @Demetris Moore:

    Yes, it is in Hagerstown, Maryland.  You are saying this is a good return? I am thinking it would take years to make my downpayment back?

     There is no such thing as a good return or a bad return.  There is only the the expected return as measured against your risk tolerance.  People with higher risk tolerances will want higher cap rates. Those with lower risk tolerances will prefer lower cap rates.  I prefer cap rates lower than the ones available in Hagerstown.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group546 Reviews
    WebsiteView Page
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  • Allyssa McCleery
    Rental Property Investor · West Palm Beach, FL · Member since 2017 · 262 posts · 136 votes
    7y

    Coming from South Florida that is not a bad cap rate. Is your property manager including tenant placement as part of their management fee? I personally would factor for 10% vacancy because you have one bedroom units which tend to attract more transient tenants and therefore higher turnover. Assuming the tenant placement is not factored into the 10% property management fee, I would conservatively estimate 3 weeks for turnover/new tenant placed as well at 50% of the monthly rent paid to the manager for tenant placement. This means you can look at it as 5 weeks of vacancy (5/52=9.6%). You also want to make sure that you are evaluating the taxes based on the purchase price rather than what the seller's taxes are because the property will likely be reassessed for taxes after the sale. Is your "other costs" for capital expenditures? $1000 per year for maintenance sounds pretty thin for 7 units. 

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  • Steven Kleppin
    Rental Property Investor · Manama, Bahrain · Member since 2015 · 96 posts · 68 votes
    7y

    @Demetris Moore As @Russell Brazil suggests, cap rate is a reflection of risk. More risky areas (like Hagerstown with very stagnant population and job growth) should correspond to higher cap rates. But you can also look at cash on cash return, which comes out to about 10% on the numbers you posted. If you can consitently hit your numbers, that's not a bad return for your family. 

    Also consider the age of the buildings in Hagerstown. They aren't young. What age/condition will they be in 30-40 years from now if/when your children have ownership (making an uneducated assumption on holding period).

    I hope your "other costs" is accounting for capital expenses such as eventual boiler, furnace, roof, driveway repair.

    1Reply
  • Ray Johnson
    Irvine, CA · Member since 2016 · 545 posts · 614 votes
    7y

    @Demetris Moore I'm seeing the same items as @Allyssa McCleery and @Steven Kleppin are seeing. On a building with all 1 Bedroom units, at $600 per month in Rent per Unit, I would not factor the Vacancy at a Flat 5%, I know this is a common practice mentioned in many of the BP podcast, it's done to simplify explanations for newbies. Your vacancy reserves should be tied to the monthly rent of a unit and the probable vacancy coverage. I see you're at $2,520 for per year, that's 4 or your 7 Units  with a one month vacancy turnover per year.While some tenants in a One bedroom are 1 year tenants, I have other one bedroom units with the same tenant for 3-5 years. This is going to depend on your area to make those assumptions. 

    What is the age of the building? Status of the mechanicals, HVAC's, boilers, etc.. when were they last replaced? What is the status of the roof? when was it last replaced? At $4,200 per year set-aside for "Other Cost", you will want those other items to have a lot of life left in them before a replacement is due.

    Lastly, Is this building and all Units pure Turnkey, meaning no additional rehab will be taking place or value-add to increase rents?

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  • Account Closed
    Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
    7y

    Your kids will love you more if you put the 97k in an index fund for them

    2Reply
  • Obi I.
    Rental Property Investor · Baltimore, MD · Member since 2016 · 109 posts · 31 votes
    7y

    @Demetris Moore It will take 13 yrs to recoup your downpayment assuming a $390k mortgage, 6% annual financing cost, and a $30.9k annual NOI. I see that you're assuming a 10% property management fee? Are you self-managing or hiring a 3rd party manager? If you're hiring a 3rd party manager, did you run your income and expense numbers by them? If not, how did you come up with these numbers? If your 3rd party manager came up with these numbers, and you're having second thoughts, do you have backup PMs that you can run these numbers by to get 2nd or 3rd opinions? Also have you connected with any local MF investors or lenders to double check the numbers? These are a few ways you can perform additional due diligence and increase your comfort level prior to a multifamily investment. Ultimately, you have to decide, based on your due diligence, goals and risk appetite.

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  • Demetris Moore
    OP
    Member since 2019 · 6 posts · 0 votes
    7y

    Yes, it  will take a long time to recover.  The maintenance manager was from the previous owner and they were paying him 10% of income and he did other things around the property too.  I believe he knows home improvement work as well as collect the rent. He said he goes in and do everything when the tenant moves.

    Thank you for helping me out on this deal. I called the finance guy  and told him that I want out of the deal because I will be losing money. I will be worst off than I started. I think the finance guy should have did his due diligence in looking at the numbers to make sure it’s good cash flow. days prior, I put a contract on this multi-unit and it was accepted. Thank God, I was with in the terms of the  contract to cancel the agreement and receive my earnest money deposit back.

    I calculated my cash flow to be 455.00 NOI. With a mortgage payment of 2100 per month 7/1 arm with 3-year prepayment with an 8.175 interest rate . He gave me a rough number. it does not include insurance and interest, so I plugged the insurance in the "other cost" excluding maintenance fees and vacancy.

    Estimated mortgage payments on 7/1 arm with 3 year prepay$2,182.00
    excluding principle and Interest built into the loan
    May need a personal loan of 30k
    Rent a year$50,400.00
    Monthly$4,200.00
    A list of all Annual Expenses estimated run down
    Water/sewer/trash$2,200.00
    Gas Heat$1,440.00
    Common area Electric Annual$60.00
    Insurance$2,920.00
    City License 75.00 unit= 525 years$525.00
    Management fee at 10%$6,000.00
    County Tax$4,028.00
    vacancy
    Maintenance fees
    The other cost breakdown
    water/sewer/trash bill$2,200.00
    Gas Heat$1,440.00
    Common area electric$60.00
    City License$525.00
    Total$4,225.00
    not including maintenance fees
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  • Allyssa McCleery
    Rental Property Investor · West Palm Beach, FL · Member since 2017 · 262 posts · 136 votes
    7y

    I think you made the right decision by passing on this. On the bright side you have learned much more about how to analyze a property and will be better equipped when the next opportunity presents itself!

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