Commercial/Apartments Deal Analysis

[Frank Gucciardo]

Hi All,  This is a complex (for us) opportunity that I'm going to lay this out as concise as possible.  I'm sure this is a cake walk for most but would be our first property and is larger (# of appts) and includes a restaurant and storefront.  We weren't event thinking of getting into commercial right away, however, this opp presented itself and is hard to ignore.

Property Info:

Asking 349K 

Max Offer 310K

3 stories built in 1920.  North of NYC with easy access to transportation. Vacancy rates of 3.5-4% and rents growing in the 7-10% range annually.  It's NY so taxes are high.  The exterior has been updated and is in excellent condition.  Metal roof (needs to be inspected).  Furnace is less than 10 years old. 

5 Apartments; 3 Studios and 2 1bd/1ba - All currently leased on 1-year leases that switch to month-to-month at end of year.  All rents are consistently $100-150 below market value.  The building owner also pays for heat and hot water (which is crazy at such low rents).

6th Apartment: on 3rd floor, needs work (floors, paint, doors, Kitchen, Bath, and some other minor stuff.  Also needs to install sprinkler system from appt door to egress (6K estimate from two local companies).  I'm figuring 12K to get the appt rent ready (maybe less) and the 6K for the sprinkler system - 18K total in expenses.  This is not rented as it is not up to code.  Could be either a 2 or 3 bed appt with rents in the 1000-1200 range.

Restaurant - on a 10 year lease with 7 years left.  I think the rent is low but need to do some more research on going rates.  Not much I can do about it since the agreement would still be in effect.  There is a 3% annual increase in the agreement.  It's a busy place and we eat there all the time so I don't think it's going anywhere.

Storefront - small, currently has a clothing shop in it that rents for a reasonable amount.  It has been a revolving door and hopefully this place sticks around.  The restaurant has an option to expand there if they want it.

Current Rent Roll - $5136 Mo. / $61,632 Yr.

Expenses (Taxes, Gas, Common Electric, Repair fund, Garbage, Fire Alarm, Insurance, Water) - $2,500 Mo. / $30,000 Yr.

NOI - $2,636 Mo. / $31,628 Yr.

Mortgage - The balance of the comm loan (12yrs left on 15yr term) is 254K - 2,190mo.

They are open to seller financing the balance of whatever is the accepted offer.  I also have opp to use cash/401K loan to finance the balance.

This place is a money loser (read poorly managed) with the current #'s but has value if 1)I can get the rents up (figure over a 2 year period) and 2) I can get the top floor up to code and rented out.  Here are the #'s for the next three years with getting the appts up to market rent and the 6th appt rented (all in 2016).  Max offer of $310,000:

Item	Curr	2016	2017
Mo. Mort.	3108	3108	3108
Mo. NOI	2636	3825	4083
Mo. Cash Flow	-472	717	975
Annual CF	-5668	8604	11705
Per Door	-67	102	139
Cap Rate	10.20%	14.81%	15.81%
CoC	-7%	10%	14%

Any and all feedback is appreciated.  

[Steve Vaughan]

I see.  Thank you for clarifying @Frank Gucciardo.  So, at your price of $310k, you would put down $56k for a property that needs a lot of work and will lose money for the first year?

I agree the assumable financing is attractive.  I would tell the seller I need all my money for fix-ups and will put enough down for closing costs/ commissions if I went ahead with it.  He is the one in trouble.  He made a mistake and will have to take his 'equity' in favorable (to you)  installments.  Never buy just so someone else won't get it!

Last thought is the offer price.  Whatever price you offer, don't do a nice, round number.  Offer something that looks like it was a result of complicated analysis - like $303,462.  $310,000 looks like what it is - PFA.  Good luck!