Please help analyzing this deal (18-unit apartment complex)

2 Replies

Basics of the deal:

Asking $750,000 with seller to owner finance with $25,000 deposit

Gross income - $111,000

Taxes - will be 3.7% of actual sales price

Insurance - $7,000

Utilities are $7500

Assuming 5% vacancy rate and 10% repairs (property has had recent maintenance work and new roof and parking lot and nothing that appears imminent)

Assuming 7% property management (which is average for our area) although we will self-manage at first although I know that we need to consider it in our analysis

The numbers don't work at their asking price.

We'd like to offer $625,000 at 6.5% interest for 30 years, balloon after 20 years

The cash on cash return without the property management is 27% but with the property management, there is potential for negative cash flow in years with high vacancy and repairs. We would really like to get into this deal because they are willing to owner finance 100%, we need very little down payment (much less than a bank would require), and we would have a fixed rate for 20 years, whereas our current portfolio lender will only fix for 5 years. For all of these reasons, and because we see this as our way into a larger property which we may not get otherwise without a seller willing to owner finance, we really want to make this work, but without being stupid.

My husband and I are not looking for cash flow to replace our income. We both have full time jobs and will continue to work. Our property investments (we currently have 11 units) have always been with the intent that they would be our retirement some day.

Any thoughts or insight would be appreciated.

Including property management, it sounds like you're estimating NOI at roughly $46-50k with your offer price, assuming all goes to plan...is that right? So at your offer price, that would be a cap rate around 7.5-8%.

With an interest rate of 6.5% on the loan, I don't see much of a safety margin.  

Do you see much opportunity to boost rents or reduce utility costs?  

The problem with high leverage is that it can't turn an OK deal into a good one, but it can definitely ruin an average deal.

As Jordan pointed out the difference between your cost of funds and your return is very small.  I require a 3 percentage point difference.  Your mortgage constant is 7.58%.

I would be budgeting at least $18,000 for maintenance and capital expenses.  I also would want to know if the 7% management fee included finding new tenants?  You will probably be averaging one vacancy at all times.

Good Luck

Bill