Critique my Potential Purchase Lexington, Kentucky

14 Replies

Hi! I'm looking at my first purchase and I think I'd love feedback on the numbers I found

12 unit apartment building in Brucetown area

Purchase: 380,000, 20% down
Expenses, Annual:

  Property Tax: 1400
  Insurance: ~3000
  Maintenance: 2000

  Mortgage Pay: 19, 231
  Vacancy: 3000 (5%)

  Property mangement: 6000
  Misc Cost: 200

Annual Income: 57000
  Cash Flow: 25,000

NOI: 44,000

I'm really thinking that this may be the one I want to make my first purchase but I'm hesitant because it seems too good to be true. The cap rate seems kinda high. Also, some minor rehab appears to be needed for a few of the units. The area seems kinda like a C neighborhood If I do make an offer, I'm going to offer much lower because of these reasons. 

@Michael Kay A few notes: 

1. Expenses are very low at $12,600 per year (~$1000/unit). 

2. Average rents are low at about $400/mo.  That said, maybe they could be raised? 

3. Who pays utilities? 

4. Take into account a tax increase on sale or at least a few years when reassessed. 

5. Look at crime at a site like https://communitycrimemap.com or https://www.spotcrime.info

Hi @Michael Kay,

Here are a few of my first reactions:

-Property taxes in Lexington for a parcel worth $380,000 will be much greater than $1,400 per year. The local PVA website is a great resource: http://fayettepva.com/

-The city has historically underinvested in the neighborhood of Brucetown. You are correct in classifying the neighborhood a C, it might even be a D.

-What types of units are the apartments, and what do you expect to get in rent? Based on your 57,000 figure for annual income, are you estimating $400 rent per door per month?

-Is your maintenance budget $2000 for the entire year on 12 apartments? This estimate is unrealistically low based on my experience.

Where are you getting your cost estimates?

Hope this is of some use and feel free to contact me if you want to talk further

As @John L. said I would definitely take a closer look at your expenses.  Your maintenance and repairs are super low.  If  a few of the units need repairs then that would lead me to believe you'll be dumping money into other units periodically the first year or two even if tenants don't leave.  We bought a smaller building than this a year and a half ago that had deferred maintenance, but had 100% occupancy.  We didn't cash flow that thing for the first year as we had so many small maintenance repairs and requests.  We knew it going in and now it operates much in the way we had hoped it would, but just be prepared for that.  I would also set aside some cap ex money, which I don't think I saw in your analysis.  Also, check on your utilities as mentioned above as well.  Best of luck.

It appears to be low income property. I think your vacancy rate is set to low.  Lower income will produce higher turnover.  I had a low income 4 plex and the best I could get my vacancy rate was 20%.  This was in Lexington KY.  Also are you sure the property tax will be that low?  If so I am guessing the property value is not very high in that region.  So perhaps the rural area might be better vs my 20% vacancy in a urban area.

@Michael Kay , I lived in north downtown Lexington for the last 4 years and would not consider paying 380k for any property in Brucetown.  Yearly property taxes are almost across the board 1.2% of the property value as calculated by the PVA. I would also calculate tenant turnover as part of your yearly expenses, this is a high turnover area, I would calculate maintenance at 10%/mo for the first year, and 10% capex at the very least. 

@Michael Kay I agree what with others have stated. Good thing you reached out to BP first and got a better idea of your numbers. I suggest you use the advice given and rerun them and evaluate if this seems like the best property for you based your buying criteria. 

I would also consider if there are any common area maintenance costs associated with the property (laundry, lawn, trash, pest control, utilities, fire extinguisher checks, ect...) that need to be figured in your numbers for commercial properties.

@Garrett Spear ,

Thanks for the note about PVA site. I think I had a typo in it. I think some of my cost estimates were definitely off and some of them were guesses. Definitely a way to drive the point home!


Thanks so much for your reply, it really does help!

--michael

@Bob Woelfel ,

Yes, definitely expenses were wrong. What would be a typically good estimate for expenses? 

Thanks so much for mentioning these points. It really helps and drives home what I need to remember about analysis.

--michael

@Brian Johnson ,

Interesting. That's definitely a good thing for me to remember. I don't think I've ever read that so far, so it's super helpful. :) I really do appreciate the reply, it really helps me out.

--michael

@Jim Wilcox

Oh, absolutely, I'm grateful for BP. I figured my first public analysis would be terrible. It'd be suspicious if I did it right the first time.  :)

Thanks for the note about common area maintenance. Definitely a good idea to keep in mind!

--michael

@Michael Kay np. All part of learning and BP is a great place to get some direct feedback. Everyone has brought up all solid points and good luck in all your future REI ventures.

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