Hi All, Contemplating making an offer on a new 12-unit apartment building. Below are the vitals, would appreciate any thoughts.
Purchase Price: $710,000 +/-
Units: 12 (All 850 SF 2 bed / 1 Bath units)
Current Monthly Rent: $9,300/mo (There seems to be room to push this to at least $9,700)
Annual Rent: $111,600 + other income $905
Vacancy: 5% (Property is currently 100% occupied with strong occupancy history)
Effective Gross Income: $106,925
Management: 5% (will be partially self managed) $5,079
Utilities: $6,302 (only common area electric and electric heat, all other separately metered)
Water Testing: $3,177
Total Expenses: $53,370
Cap Rate: ~ 7.5%
Cash on Cash: ~12% (based on 20% down and 30 year am at 5% - still finalizing loan terms so subject to change)
50% Rule ($/unit/mo): $117.17
1% Rule: 1.31%
Debt Yield: 9.55% (based on 20% down)
Property is in overall good condition but could use some upgrading. Pending inspection there appears to be little to no immediate deferred maintenance. The area is decent, but most likely not going to experience significant growth. This would be a long term hold for cash flow and would be a stepping stone from smaller multi's (own 13 units in 4-5 unit complexes now) to larger apartment buildings. Anything I'm missing here? Thanks.
Thanks @Tristan C. I'll take a look at that.
Hi @Roig V.
Based on what you suggested the property seems decent. I think from a numbers stand point you have accounted for most items. I would still account management at 10% even if you are managing. You want to make sure the property is still performing based on conservative estimates.
How is the area B, C-, the economy have you looked at recent population trends in the area, job stability? Does the property present any value add and re-positioning opportunities i.e. how much can you increase the rent on the units if you were to spruce up the place? Do you have any insight into historical rents,vacancies, tenant profile? When was the roof last replaced? # of parking spaces?
Anyways good luck!
Thanks @Azeez, I would say the area is very much B and slightly rural however it is within a 5 minute drive to several major colleges, employers, and what would be considered an A market. There was some population growth in the neighborhood several years ago however my sense is that it has probably stagnated. The area is surrounded by very solid markets. I don't think rental increase potential would be significant however a 5% bump or so to in place rents seems do-able. As far as historical performance, we are expecting detailed docs during the diligence period (if it comes to that). Good question on the roof, I believe it is has some life left but I do need to confirm that. Parking is sufficient at 2 spots per space (off street). Thanks for the feedback.
A couple things , since you have water testing I am assuming a private well? Aside from quality testing check depth and production. I went to the added expense of a water meter on the well which has helped me track use and identify leaks. For septic you can't see deferred maintenance or design issues so check it out. These are bigger ticket items that could work against your ROI. Are you saying you pay only common area electric heat or all electric heat. Might be room for improved revenue in either case. Looks alright otherwise. Does it have a fire system and is that system up to code? Our insurance is tough with a well and no fire hydrants.
Thanks @Colleen F., there is a private well and we are looking into that. Appreciate the feedback. With regard to electric, we are paying common electric and electric heating expense. I believe everything is up to code however we will dig into that during the diligence period. Thanks again for the feedback.
How does the heating unit look? Gas forced air, Boiler, Oil burner??? What is the age and condition? Also are you assuming you will get a 30 year amortization on this commercial property?
@Jaret Harris, upon initial inspection heating system looks good, it is electric heat however my business partner who is a contractor is conducting further review and we will also have a formal inspection done. We submitted a preliminary offer at 700k with the seller carrying the financing. We were countered to 735k, seller is agreeing to carry 10 years, 30 year am, between 4.75 - 5.0% fixed (still negotiating rate). We have reason to believe the seller is trying to hit 720k. Seller is also willing to carry at 85%, as opposed to 80%. The lower down boosts the C-o-C however I want to make sure we don't get over-levered here. At 720k the metrics still look solid:
cap rate: 7.5
The above is with 15% down. C-o-C goes down to 12.15% at 20% down, and DCR goes up slightly to 1.49x.
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