I had posted this deal a couple of months ago. The property is still listed (red flag) and I am revisiting this opportunity.
Asking Price: $260,000
Apartments: 9 Units (Fully rented, average rent is approximately $370/mo per unit ... total $3330)
Restaurant Space: 1566 Sq Ft (Currently rented for $1000/mo)
Retail Space: 756 Sq Ft (Currently rented for $500/mo)
Total Gross Revenue: $4830/mo ... annual $57,960
Taxes - $6098 (2.345% of Purchase Price)
Insurance - $1800 (Estimation)
Maintenance/Repairs (5% of PP) - $13000
Property Management (10%) - $5796
Vacancy (10%) - $6166 (10% + 1st month rent for vacancy)
Miscellaneous (Garbage, Pest, Snow Removal) - $1200
Water - $1500
Mortgage (4.00%, 20-Yr Am, 20% DP) - $15120
Total Expense - $50,680
Free Cash Flow/Mo - $606 ($7274 annual) ...$67 per door.
Debt Coverage - 1.48
1 or 2% Rule - 1.86%
50% Rule - 61.35% (Allocation to repairs is heavily conservative.)
ROI - 8.62%
CAC - 13.99%
Vacancy for the apartments are near 0%. They have been practically 100% occupied for the last couple of years. The property is low income, attracts Section 8 Tenants. (I have requested how many are in-fact section 8.) I will be completely an absentee owner, property manager will handle everything. There are two apartments that need renovation that are currently not being used, this would make it a total of 11 apartments. (I do not know the extent of the renovations.)
The commercial space is rocky at best. I would not rely on that income whatsoever. The apartments rent above the commercial space. Low income above a commercial property is not indicative of success. My goal is to purchase the property at a price which the apartments will service the debt service at a 1:1; the commercial space leased would be gravy. (Taking into account adequate vacancy. I feel 10% is a conservative estimate considering the property manager is paid to keep vacancy low. Not to mention she manages multiple section 8 properties and has experience in this niche. In addition the property manager does not collect 10% from the Section 8 subsidized income portion of the rent as "she does not do work associated with collecting the Section 8 portion of the rent." Therefore, management fee of 10% is conservative.)
I have even considered renovating the commercial space into additional apartments in order to keep a more consistent stream of income. To reiterate, the commercial space is not reliable and has proven to have quite a bit of turnover in the last couple of years.
The bank terms are exact. I am currently a commercial lender with the Bank that would offer said terms. (I prefer the longer amortization in order to give flexibility in payment if vacancy/repair cost does in-fact become an issue. I will prepay the note during good years to reduce principal drastically.)
How do you guys feel about the deal in general? It is located in a decent area surrounded by commercial business. The town's commercial sector is not the best, quite a few business are leaving, growth is stagnant. There was a Bank of America directly adjacent to the property which would attract business to the commercial space. This has since closed. There are small mom and pop shops all around this area. Rather busy during the day and evening.
In addition, I am exceedingly nervous in terms of the repairs/maintenance associated with a Section 8 rental. I do realize this will come down to tenant quality which will be the managers responsibility. I have heard horror stories of massive repair bills from low income tenants. What are your guys' experience? (In my mind approximately $100 in repair/maintenance per door or 5% of purchase price is exceedingly conservative.)
A few of my (novice) thoughts:
- The trend of local commerce moving out is a big red flag to me. I would want to invest in areas that are growing / increasing in demand. The fact that businesses are leaving is not a positive sign for the future outlook!
- If that wasn’t enough to drive me away then I would want to get to the bottom of those two vacant apartments. How much renovation is needed to get them to a rentable state? This could make the difference between a mediocre deal and a good deal.
- @ $67 / door the deal does not sound very enticing for a low-income (higher-risk) area, though that number alone isn’t the end-all (for instance the cash-on-cash return and rent to value ratios sound decent, but you have to take all that in context of the area and trends).
- Your maintenance / repairs estimates do sound highly-conservative. Perhaps try to estimate up-front renovations separately so you can include a more realistic monthly maintenance estimate. If it is closer to 10% that nearly doubles your estimated cash flow.
- I know next to nothing about section-8 renters so I would really want to study up on that before jumping in.
- Maybe the most important question is what do you think you could get the property for? They may be asking $260k, but given the situation I’m willing to bet they would accept a lower offer. Some clues that may help:
- Can you see how much it last sold for?
- How long has it been on the market?
- If you’re still really interested then starting a dialogue with the seller may give you a better idea of the seller’s situation and incentive to sell.
I’m curious to see what others weigh-in with – and please correct me where I’m wrong so I can learn too!
There are a lot of moving parts to this and you have to look at them all.
First the 9 apartments. If I assume a 50% expense ratio and a 10% cap rate I get $370X12X.5X9 divided by .1 or $199,800.
There are two vacant apartments. I am willing to pay only one half less the estimate for repairs. I would get $370X12X2X.5X.5 divided by .1(cap rate)= $22,200 les $10,000 in repairs. Obviously, you can change when you know the cost of repairs.
I don't know any thing about the terms of the contracts on the two commercial spaces. Because of this I would calculate as $1,500 per month times 12 multiplied by .5 divided by a 10% cap rate or $90,000.
This creates a value of $302,000.
Please heed Christopher's comments. When commercial property goes vacant it is usually vacant for a long time.
Hopefully, you will find these comments of some value.
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