8 Unit apartment building, what would make it a good deal?

Question

Greetings BP folks,

I would love to have your help in helping me understand what would make this a good deal.

I have found an 8 unit apartment building all brick 1 bedroom units built in 1992.  Has detached 8 stall garage and parking.  (MLS: 50095070)

Here are the details:

$312900 / 1br - 5400ft² - 8-Unit Apartment (Green Bay, WI)

Asking price: $312,900

Rent roll: $3,730/month

Property management: $404/month

Maintenance: $635/month (includes landscaping, snow removal, and repairs)

Utilities: $435/month (Electric, gas, water, sewer)

Taxes: $7,100/year

Insurance: $1,500 (estimate)

Gross income: $44,760/year

Expenses: $26,288

So my question, at what price and financing would this be a good cash flow property?

Did I miss anything?

Aaron Montague · Answer

75k is what I'd pay for this place.  I'm looking to make $100/door though.

At 137k, you get 15% cash on cash return from your numbers.  I echo the "your heat expense looks WAY too low" comments from above.  I'm guessing you are using pro forma numbers for the heat?  I'd ask to see the last 3 years worth of bills from the oil/gas company.

The best way to make this a good deal is to transfer the costs to the tenants.  Electric heat is a good way to do this without having to do massive renovations.  I was able to put baseboard in for about $1300 for a 4 room, 1 bedroom place in one of my buildings.

Nii Okai · Answer

@Pavel

Is there anyway you can increase the income and bring down the expenses? Is there any income from the garage stalls? If not could they be rented out to generate additional income? What about vending machines etc.? From the look of things, the expenses are 66.4% of the income, on the other hand the purchase price seems to be out of sync - the maintenance costs are high indicating that there must be some thing going on  - Too much for a 20 year old house. Find out why. In my opinion, at this price, this is an aligator - but which, at the right price may become a great deal.

In doing so, remember though that many a time, some great deals come disguised as ugly deals - the key then is to find the problem, resolve the problem and bingo!!!

Jean Bolger · Answer

Be leery of owner paid heat in Green Bay, WI. It gets colder than a well-digger's elbow there. Those figures for utilities  seem low to me, but you can usually just call the utility company and ask for the last year's average monthly cost  and they'll tell you the actual numbers.

David P. · Answer

Pavel, a deal is where you cash flow.  Purchasing an apartment building(s) is different than purchasing 4 or less units.  However you probably already know this, and it's important to still understand your ROI.

Use the Bigger Pockets Property Cashflow Analyzer:

http://www.biggerpockets.com/files/user/wmonroe85/file/property-cashflow

There are other spreadsheets available for apartment buildings as well - take a look to find out what works best for you.  I have modified for my purposes and works well to understand the numbers quickly.

Also, when you take this to the bank, they will ensure you have enough cash flow to make the deal happen as this will be a commercial loan.  I know all of this is general information, but what makes it a good deal depends on your point of view and ultimately what the bank sees as a good investment.  make an offer what you think is good; with contingency of financing... this way you can lock it up and iron out the details with the bank.

Good Luck!

Elizabeth Colegrove · Answer

Your insurance looks to be pretty low.  Are the utilities for only common areas or all the units? Is that  per month or year? Those numbers seem lretty low!

Pavel S. · Answer

Elizabeth. thanks for the input, I am looking around to get a more accurate insurance quote for the building.

• The $1,500 (estimate) is per year for insurance.
• The utility is for all units, Owner pays the heat, water, and common areas.

Pavel S. · Answer

Basically, buy at price that has positive monthly cash-flow $xxx/door and then improve it even more over time.

That is solid.

Aaron Montague · Answer

@Pavel S.

It will probably cost you a few tenants as well as dollars.  Adding that cost to their monthly budget is something they may not be prepared for.  Plus some people's reaction to any increase in cost is to simply leave.

The big thing here is not to buy this place, or any deal, just because it looks cool.  I always look a deal like this one to see if I can make money tomorrow.  Can I write a check, make my numbers and not have to touch this place again?  Once that is satisfied, I find ways to make the place cheaper to own.

Pavel S. · Answer

@Aaron Montague

Thanks for the tips.  I wonder how much it would cost to get all utilities over to tenants...

Ralph R. · Answer

Don't forget about vacancy . I don't think its a good deal.

8 Unit apartment building, what would make it a good deal?

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