I came across a 6 unit apartment that the owner wants to sell. The complex is an old school board building that has been turned into a 6 plex, all with there own entrance and parking. Has a new roof, new plumbing and good electrical systems.
All of the apartments are Furnished with Antique furniture. The owner is VERY picky about her tenants--No pets or children. :(
I'll give you the numbers:
She is asking $150k for the deal, with the antique furniture. 130K without the furniture.
The avg apartment rents for $600/month x 6 = $3600
3600 x 12= 43,200 (Income)
Expenses= 1,500 x 12= 18,000 (expenses)
25,200/150,000= 16.8% Cap Rate with the furniture
*25,200/130,000= 19.4% Cap Rate without Antique Furniture
NEGATIVES= 1. Water and Electricity are on same meter.
2. All of the apartments are not rented because the owner got her note paid by just having 2 renters. So, I will have to get some quality renters, which should not be a problem in this market.
So, What am I missing? Is this a good deal? What other info am I forgetting?
Thanks for your advice.
first off, the property is currently only 33% occupied. your analysis assumes it is 100% occupied. sure, maybe it's easy to get it leased up, but in this scenario you are paying the seller as if it is fully occupied.
that said, it still might be a good deal. only you know how easy it will be to get leased up. what happens if you can't lease it up and fill the units? how do you know the current owner isn't lying and can't actually get the units rented?
how do you plan to finance the deal? you might run into difficulty if using a lender because of the current occupancy.
On the face of it , around 22k each for apts that could bring in $600/mo is a good deal, but be sure they will really get that. Furnished apartments usually go to transient short term tenants. An apartment furnished with "antiques" will have a very tiny number good of potential tenants. (Her reason for why the other apartments aren't rented may be true, or...) So ignore (and don't buy) the furniture, unless you have expert knowledge on antiques and can be sure of their resale value to you outside of this deal. I think you'll do much better without it.
Personally, I don't like places without tenant paid heat, etc-- but maybe your costs for that down in Alabama are pretty reasonable. Or you could look into a ratio billing system.
Also- i'm pretty sure that the current landlord is in violation of Fair Housing laws w/ the "no children" policy, so just be aware that that is something to avoid if you do go forward with this.
I have owned a few Multi-Units and for what it is worth it sounds like you have a good deal on your hands. If the neighborhood is a good neighborhood that you can find good quality tenants that will pay on time, low maintenance after good inspection, I would say go for it. You have enough money between the (Income-Expenses) to be able to deal with some unexpected issues. The one thing I would do differently is run your numbers the way she used to run her numbers and see how it pans out. Its good that you see the numbers and potential of renting out the 6 units but I see you posted that she paid her note with just 2 renters, but why only 2? Were there other issues with the other apartments? I would get those checked thoroughly. After running your numbers with just 2 or 3 units rented and you still see the potential for profit, I would definitely jump on it and add it to my portfolio!
Thanks for the advice Chris M., Jean Bolger, and Sean S.!
Just saw the Cash Flow Analyzer on BP. When I entered all the numbers the cap rate was not as I expected. :/
It was actually 11.5%
So, question: Is this still a good deal? If not, what would you offer in order that you would feel good about the deal. Remember that the price is $129,000 (w/o the furniture).
The occupancy rate is concerning. I wonder if you could work out some sort of agreement with her to fill the property first. If the market is no problem for leasing and all the units are in good condition, it shouldn't take her long to get tenants in all the units. She will certainly attract more investors if the property is fully occupied. I'm not sure how much interest she has in the building but if you can have her lease up the property with qualified tenants first, you will be taking a lot less of a risk.
She does not need to deny applicants due to children. She could get in some trouble here.
As for the furniture, I would buy it without. I am no expert in antiques but I do not imagine it will help you with leasing and the value of each piece is only worth what you can actually find a person willing to pay for it.
Overall it sounds like you may have found a great deal. Do your due diligence. If you reach a point where you think you've researched too much and asked too many questions, you've probably just done enough.
I am no expert, and may be way off base here, but would the current owner consider doing a lease purchase or maybe some type of owner financing for you based on the current occupancy? If you could go this route then she would still own the property or hold the note on the property but allow you to control the property. This would allow you time to get the vacant apartments rented, increasing the value of the property on your terms with your tenants, then you could bring in outside financing (bank or mortgage company) which would allow you to potentially have a lower down payment due to the increased value of the apartments being fully or near fully occupied. This would lower your risk of the apartments not renting for an extended period of time by allowing you to make sure that you can rent them for what you expect to get. If they do not rent or do not rent for the amount you expect them to rent for then you have an "out" without having a large amount of money or credit tied up in the deal. Of course, this assumes that the current owner is willing to do this due to some motivation to sell the property. There is always the chance that you could end up loosing some of the upfront money that you have in the property, as is the case with any investment, but it reduces the risk of taking on the deal with the vacancy that it currently has. It also allows you to put tenants in the property that you have chosen rather than relying on someone else's choice of tenants that you may be stuck with for the duration of the lease.
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