Apartment complex with mostly studios

16 Replies

Hello all, I recently came up across a small apartment complex (4 buildings, total of 22 units) which would be part of a 1031 exchange from a previously sold retail plaza. The potential downside is that most of the units are studios and efficiencies with high tenant turnover. It is also a building that was built in 1960. The upside is that the units stay rented, have a waiting list of prospects, and is located in a decent, quiet neighborhood with primarily single family homes. What are some long term concerns I should have in partaking in this investment? Any and all input would be greatly appreciated, especially from those of you who have had prior experience with this type of property investment.

There is not any information here.  How much is it?  What do the apartments rent for?  What is the vacancy rate?  What does it appraise for?

Apartment complex listed at $1.25M, 22 units.

All units in the $625-$700 range. Reported cap rate of 9.75%

Things to consider: 

- One of the buildings has only one meter, so landlord pays all utilities (gas, electric, water). Cost or re-metering might be hefty.

-No vacancy rate reported, as owner claims 100% vacancy, with waiting list. You could potentially factor in a 10% vacancy to be conservative.

-Some section 8 tenants. 

I am evaluating a building with 15 studios right now and I have the same questions. The turnover appears to be fairly low per the rent roll and it appears turning over the units would be fairly inexpensive. I have some concern about constant turnover as I bring rents up to market rate. The current owner is at least 20% below market. I am wondering what type of person would live in a studio for more than a year?

Some people live in studios because they are less expensive and some people like them.  

I think  the 22 units are over priced and the building where the landlord has to pay the Gas and electric and the water sounds like a problem.   

Single people need to live somewhere . Not everyone can afford a SFH . As far as the building with one meter , factor getting that changed to separate meters right away .

What would be a decent cap rate? at least a starting point to guide negotiations?

Ifs its 1.2 Million, and 22 units,  individual owned in a non primary metro area, then you should offer to sign a NDS and ask to review the Tax returns pertaining to the subject property for the previous 36 months.  A lender will ask you to see yours for financing it, then you have equal right to ask to validate the sale price,    And you should base price on what true reported income was not what it could be or should be.  If you get an excuse for not being able to see them then start by cutting offer by 20%

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Thanks, Jeb. Just curious, but why a 20% cut? Is that standard practice in this type of scenario or just fairly arbitrary? Along with my business partner, I am meeting with the owner and agent tomorrow. I do not want to enter discussions without strong talking points.

From a liquidity stand point it may be much harder to sell a building with all 1 unit apartments or studios unless the area has a demographic that has stability and tendency to rent 1 bd or studios. With potentially less marketability you may have to sell at a higher cap rate in order to unload the property in the future if that is a consideration.

The other consideration pertaining to liquidity is the fact that some banks simply will not finance or offer much more restrictive programs for buildings with that type of unit mix so I would talk with local, regional, and national banks to see if they have an appetite for that type of collateral. This may cause you to get less favorable terms, rates, or lower LTV's when trying to obtain financing.

Thanks Albert. From a strict buy-and-hold perspective--i.e. not taking into consideration the future marketability--should an apartment building in an SFH-dominant neighborhood command a higher cap rate at present? 9.75% may be attractive in other markets, but in this scenario, it seems low, no?

@Nadeem Arshad I have a building with 28 studios and 10 1-beds.  I pay all utilities (water/sewer/garb, gas, electric).  In comparing market rents, we were on target but other units didn't cover all the utilities we did.  We added a utility surcharge.  Our current residences pay $15 for individuals, $25 for couples.  New residents pay $65 single, $85 couple.  We call it "Flat Rate Utilities". My actual cost for all utilities combined averages $97/unit/mo. 

There is always a market for smaller units.  We have students, singles both young and old, couples, and a few single moms with small children. While some are short term many stay multiple years. My current rent roll shows 9 have stayed 5 or more years (longest is 11 years), 15 have stayed between 2-5 years, and 14 have been less than 2 years. 

@Albert Bui has an important point on liquidity.  When the market was good we purchased and refinanced with no problem.  But when the market went down it took 18 mo to find someone to finance it for us!  They found multiple excuses: location, size units, type of building, etc...  Be sure you are in or very close to a major metro area with good freeway access (tertiary markets are tough!).  Keep good Documentation of your income/expenses, along with vacancy rates and improvements to support your value.

Good luck!

Back of the envelope, this does not look like a great deal. You are paying close to $60k per unit, that might rent for $650, and in many cases you are paying utilities. If you calculate the actual CAP rate, it will likely look pretty meager. The sellers stated CAP rate is completely useless and should be 100% ignored.

    There are lots of calculators here on BP for rental properties, start plugging some numbers in that you think are correct, and see what spits out.

" Our current residences pay $15 for individuals, $25 for couples.

  New residents pay $65 single, $85 couple. We call it "Flat Rate Utilities". 

  My actual cost for all utilities combined averages $97/unit/mo. "

Nice ideal regarding Flate Rate Utilities.

I'm not sure at this point how this would work in the midwest 

due to the fluctuation of seasons.      ( spring - summer - winter - fall )  

@Jenkins Ramon If you are paying all utilities and you have not collected anything in the form of utility charges, the seasons don't matter, you are getting more than you were.  Our utility seasons are summer (a/c), winter (heat), spring and Fall moderate. Water is pretty constant. I take my annual costs and divide by # units.  And they pay a portion of that which is still cheaper than if they were responsible for their own utilities.  We find that the summer A/C bill is similar to winter heat. 

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