Hello: I would appreciate anyone's input into my analysis of 2 multifamily apartment buildings I'm looking at. I'll use the asking price for the analysis, although I expect I'd offer less for each of them. Both are in same city, about 1 mile apart. Economy of city is decent but I would not expect much price appreciation in the 10 yrs I plan to own the buildings. I'm relying only on cash flow (not cap appreciation). I'd finance either with a 75% mortgage, 4.75%, balloon payment in 5 yrs, 20 yr amortization period. They are located in another city, so I'd hire a management firm for each. I grew up in the city where they are located so I know they are in stable neighborhoods (not declining but not improving either).
Prop #1: 10 units in 2 adjacent buildings.
Down Payment $70,000 and Mortgage of $210,000
Annual Rental Income: $47,500
Annual Expenses (incl taxes, ins, mgmt fees): $25,400
Net Operating Income: $22,100
Annual Debt Service: $16,284
Positive Cash Flow: $5,816 (22,100 - 16,284)
CAP rate: 2.1% ($5,816 / $280,000)
Prop #2: 10 units in 1 building
Down Payment of $57,250 and Mortgage of $171,750
Annual Rental Income: $56,100
Annual Expenses (incl taxes, ins, mgmt fees): $29,903
Net Operating Income: $26,257
Annual Debt Service: $13,320
Positive Cash Flow: $12,937 (26,257 - 13,320)
CAP Rate: 5.6% ($12,937 / $229,000)
I'll obviously do a thorough inspection done of each building to uncover any capital construction needs or deferred maintenance problems.
Any thoughts? Suggestions? Anything I've overlooked?
My first comment would be on your CAP Rate calculation. Everyone does it a little different but to the best of my knowledge it should NOI / Cost making Property #1 a 7.8 Cap and Property #2 would be a 11.5 Cap.
Strictly based on the Cap Rate I would certainly choose #2 over #1.
I agree w/ Dick about the caps...with this analysis it's obvious that #2 is the winner- But...
What type of buildings are these? If #1 is a brick townhouse or single story style with a shingle roof in good condition (for example) then it might be a better buy than a painted wood, flat tar-roofed bldg with apartments that are over/under.
or if one has separately metered everything, and the other doesn't.
That sort of stuff can make a big difference that doesn't show up immediately in the math
I'll third that about the cap rate. They are right. You should feel much better buying at their caps than yours.
I like to break my property analysis down to a monthly view.
I look at monthly income against:
Sewer and Water
Heat/Utilities(ask for several years of the books. Sellers tend to underestimate the costs of heat and hot water if they are the ones paying for it)
Cap Ex and Ops(I would double this number for building 1 against building 2. You have twice the number of big ticket items; roofs, furnaces, etc)
Mgmt Fee - as a %
Vacancy- as a %. 8% represents 1 vacant month/unit/year
I concur with dick and jean. I would like to know what type of area the apartments are in.
Thanks to all, especially correcting me on my CAP rates.
I'm still doing due diligence, but this is what I know so far. Property #1, being two buildings, would likely have some high maintenance costs--more lawn, 2 roofs, etc.--than Property #2. #1 have pitched roofs, #1 may have a flat roof. The pro formas from #1's seller also shows $2100 in "late fees" so I'm concerned with tenants not paying their rent on time. #1's property taxes are much higher ($5600) than #2's ($3800). Although they are only 1 mile apart, #2 is in a bit better neighbor and is closer to major employees and a medical center, which its nursing/medical students and residents would be a good source of tenants. Not sure about separate utility metering.
If your numbers are from the seller's proforma you should always take that with a grain of salt and do your research. Although sometimes you get some good info- like the late fees. But with low end rentals you will always have a lot of late payers, more evictions, all that. You just need to factor in those costs and make sure you have a strong property manager.
I am afraid of flat roofs, so I've never dealt with one. (I live in a high snow area, and they can actually just collapse if it gets bad enough. I've heard of landlords out shoveling their roof all night during a storm) If I were looking at a property that I loved everything about, but it had a flat roof, I'd find out how much a complete replacement of the roof would cost (worst case scenario) and try to factor that in I guess
Definitely CAP rate was wrong but that was corrected. It seems #2 is the winner. Your Cash on Cash will be much better as well as your CAP rate. Or are you thinking of this as a possible "value play" where you can raise property #1's CAP rate to a 9% or so then reselling it to another landlord investor at a 7% CAP? Are you looking to do one deal or another? Property #2 will have less expenses because it is one building, one roof, etc. It seems to be the clear cut winner (better returns all around, better CAP rate, less All In money, etc).
Also, late fees are not a bad thing, that is money in your pocket. Check their evictions in the last couple years and see how late people are. This will give you a good idea as to how the property is managed as well as if those late fees led to evictions or if it was just people falling a month behind.
Thanks Sterling--appreciate your thoughts. I had not considered a "value play" scenario. However, I've noticed that multifamily properties stay on the market a long time (6 months minimum) in my target city--a mid-sized midwestern city--so not sure how easy it would be to sell, even with a much improved cap rate. But.... it is something to consider.
I had a friend drive by #2, and it needs some work on the exterior, mostly cosmetic as best she could tell.
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