Apartment deal options - which would you choose?

12 Replies

Hello everyone, I’ve been analyzing deals on apartment buildings and two of them have caught my eye and I’d like your opinions on them!

1. Purchase price 2,800,000

- 18 units (mostly 2 br)

-cap rate 7.7%

-gross rental income 302,400

-NOI 215,312

2. Purchase price 900,000

- 18 units (12 are 1 bed , 6 are 2 bed)

- cap rate 10.4%

- Gross rental income ~140,000

- NOI 83,600

The first one is near a major college campus, so tenants are most likely students, the second property recently reached stabilization. I think both are interesting for their own reasons. I’d also like to mention I’m assessing these as bringing “hustle” into a deal. I’m new into investing but have experience in financial analysis and reducing costs in an engineering role.

I look forward to hear your thoughts and comments on this!

@Nathan Norway sounds to me like you are taking these figures from the listing and accepting them as accurate? The expenses are never correct and things like PM, vacancy, water and sewer are often overlooked. Property taxes are rarely accurate etc. You are better off using the 50% rule prior to getting the right numbers.

I would pick the one in the better neighborhood and where I had the opportunity to do some rehab and raise rents accordingly to force some appreciation.

@Nathan Norway

They both look pretty good.  I think the one near a college campus would do pretty well.  I know of several investors near college campuses that do pretty well and have very low vacancy.  There have been a few with broken things to fix.  Is there some type of value add you can do to either of these?  For example I see some people getting meters put in for water to help cut down on costs or they split the costs between all the units.  Are the rents in line with others in the area?  Are there some other improvements you can do to increase the rent over time?

Just a few things for you to think about.

@Nathan Norway based on the limited information that you gave, I'd go with the first one that's near the college campus.  I chose that one solely for the fact that any deal I've seen with such a high cap rate is usually in a terrible area.  It's rare to see a 10% cap rate for any property nowadays, unless it's in a terrible area.

@Brent Paul based on the rent info I’ve gathered it appears to have been mostly renovated. Looks like they redid most and are trying to sell it high to walk away strong. The area is so student dense that there shouldn’t be any issue finding tenants but attracting the right ones would be important

@Bjorn Ahlblad 50% rule is cutting gross rental income in half to estimate expenses? I’m working towards analyzing my first potential deals, so I appreciate your insight.

What else is important to look at? I understand their marketing packet is designed to attract sellers, so what else is good to investigate?

@Nathan Norway It is hard to provide the details in a post to ask whether it is a good deal or not. Breaking down the T12, line by line, is what provides a picture of how the property is being ran. We look for value add opportunities (ie: high expenses, low rents, additional income opps, etc.). The T12 and Rent Roll are what you need to analyze in debt. Only look at the proforma to get the brokers opinion but don't run your numbers off it.