23 Unit Deal

10 Replies

Hello All, 

Please help me poke holes in these numbers (owner provided for the most part). C Building in a B area. Unsure about deferred maintenance at this time.

  

Thank you!

Unit Type/ Rent /# of units

2 BDR $750.00  (16)

1 BDR $670.00 (4)

Studio $500.00 (3)

Monthly $16,180.00

Annual $194,160.00

Vacancy (10%) $19,416.00

Effective $174,744.00

Expenses

Gas $3,600.00

Electric $1,500.00

Taxes $30,000.00

Insurance $10,000.00

Maintenance ($500/door) $11,500.00

Cap Ex ($250/door) $5,750.00

Management (6%) $11,649.60

Landscaping $5,000.00

Accounting/Legal $1,500.00

Total Expenses $80,499.60

NOI $94,244.40

Need to verify that the number is true rents. Meaning no waiver of security deposit, no first months rent half off or free etc.

Example a 2 bed of 750 X 12 is 9,000 a year. If one month free the real rent is 687.50 month.

You didn't mention age of the building.

I would like to see seasoning of the tenants. For example out of the 23 units occupancy has averaged 90% for the last 3 years and 80% of tenants are the same from 3 years ago so only 20% turnover.

Payment history will be important and structure of the leases for penalties if late. Know how long evictions will take and if in a landlord friendly versus tenant friendly state.

Research any short sales or foreclosures happening from other apartment buildings locally or new product coming to market that might affect your rent rates and occupancy averages. You need to know your breakeven occupancy levels based on your down payment to service the mortgage. Generally 2 beds are more in demand so the mix appears to look good.

Make sure you are local as 23 units does not have enough scale to employ a full time repair person. 

Dane,

Your $500/door maintenance might be OK for a larger property, but on a 23-unit it will be higher most likely. Same can likely be said about CapEx. Both are a function of the mechanical set-up of the building, as well as the age and condition. Also, with vacancy of 10%, the presumed turn-over will add even further to that maintenance number, if that's where you are accounting for it.

Why is your insurance so high in Michigan - over $400/door?  Is there a reason?

I am assuming you know something I don't know about management.  10% seems more likely.

Hope this helps.

@Dane Fossee  ,  I agree with @Ben Leybovich  - the two items that standout for me is the insurance being high, and the management being low - a good figure is 10%.  Also, I didn't see anything in for trash or snow removal.  The Landscaping budget item may include the snow removal but should be indicated as such.  Now trash service is a questionable item in some communities but wanted to ensure you include this as well.  Additionally, depending on size of the building/units local code may require fire alarm systems requiring monthly monitoring service and a dedicated phone line.

On the flip side (income) is there an on-site laundry, storage locker/rooms for other income sources?  In areas with limited parking you may be able to charge addition fees for parking, pool/fitness access etc.  The utilities are something that maybe able to be sub-metered as well; but something to look at to increase your potential income for the property.

@Ben Leybovich  , @Joel Owens  

Thank you both for the great input. 

The property was built in 1971. 

What would be more appropriate cap ex & maintenance estimates?

Thanks! 

Dane - What type of HVAC is in the units?  What type of roof?  What type of foundation? Are windows original?  Is this city sewer or septic?  Is it city water or well?

Finally, rents of $600-$700 - where does that fall in your town.  In other words, are rents ranging from $400 - $850, or $650 - $1,350?

All of the above will impact projected maintenance and CapEx.

Pre- 1974 there are EPA lead based paint certification rule and contractors disturbing over a certain sq ft of space.

If you do not follow you can face very stiff penalties into the five figures.

Older building like that I usually go 60 to 65% of gross expected in costs. If there is immediate deferred maintenance then take it off the purchase price as well.

Seller will say BS you are being overly cautious blah, blah, blah. Stick to your numbers or do not buy. You do not want to overpay and then have a problem you can't get rid of. 

46% could be accurate but any deferred maint could increase your expenses any given year. be careful not to assume the property will continue operating at the same pace if the owner has neglected anything major. I think aside from the expenses others have pointed out, keep a conservative eye on the 11500 for annual maint they presented to you. that number could be significantly higher in future years on an older building. for peace of mind I would say not to calculate offers on less than 50% total expense:income ratio.

expensesyrly amtpct of total income
gas36000.020602
elec15000.008584
taxes300000.17168
ins100000.057227
maint115000.065811
cap ex57500.032905
mgmt fee116500.066669
landscaping50000.028613
acct/legal15000.008584
total expenses805000.460674

wow can I be the landscaper for 5k for a little building like that

The gas and Electric are those per month? I just finished a analysis on a nine unit and the heat and electric were 8600 dollars for the year. Or do tenants pay there own? Also what is the water bill?

Deal is dead unfortunately but thank you everyone for your input. 

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