$2.6 mil for 72 unit apt complex?

37 Replies

I'm still new on this forum and, by no means, a pro real estate investor, but I'm looking at a deal and want some input.

Located in a town near me in a good location. It was built in 1970. Says it normally stays fully occupied. 72 units. Mostly 2/1 units with some 3/2 and some 1/1 units. Rents seem low at average of just under $500/ month. (I had a 2 bedroom 1 bath HOUSE that i rented for $700/ month is much less desireable of an area close by)

Definately needs updating. I'm guessing rents are low because the owner would rather accept lower rents than fix up the property. 

Gross rents of $418K/ year. 

Expenses $174K/ year (not including debt service)

Cap rate over 9% 

Cash on cash return of over 13% by the realtors calculations

Seems like an interesting opportunity to me, but I'm here to learn from those wiser than me. 

What's it look like from the data given? What other data fo you need to get a reasonable idea?

I cant stop thinking how much value could be added by doing an overall upgrade to the exterior and then updating each unit as it become vacant. Then raising rents $100/ unit throughout.

well adding $100 the monthly rent does not sound like much but to low income people it is a whole lot of money. Not saying these people are low income but it doesnt sound like they are upper middle class. And it just depends how long it would take to get your ROI on the money you spend to rehab each unit. At a $100 per unit increase, probably a long time. Your better strategy is to make the investment and rehab the whole complex and then sell it to a REIT or conglemorate. They are paying big money for large rental communities. That would be my strategy.

One red flag I see is that you mentioned that some of these calculations were done by a realtor. I would never let a realtor run my numbers for me because their motivation is to make a sale whatever it takes. I am not an apartment expert so I will let those wiser than me go into the numbers. I would just encourage you to run the numbers on your own. 

Originally posted by @Steve Kachniewicz :

well adding $100 the monthly rent does not sound like much but to low income people it is a whole lot of 8money. Not saying these people are low income but it doesnt sound like they are upper middle class. And it just depends how long it would take to get your ROI on the money you spend to rehab each unit. At a $100 per unit increase, probably a long time. Your better strategy is to make the investment and rehab the whole complex and then sell it to a REIT or conglemorate. They are paying big money for large rental communities. That would be my strategy.

On the income level, that is what really interests me on this one. It is in a upoer middle class location with lower income rents. 

I'm looking at buy and hold, but would conisder selling to a REIT if the numbers were right.

Originally posted by @Lance Wakefield :

One red flag I see is that you mentioned that some of these calculations were done by a realtor. I would never let a realtor run my numbers for me because their motivation is to make a sale whatever it takes. I am not an apartment expert so I will let those wiser than me go into the numbers. I would just encourage you to run the numbers on your own. 

 Thanks man. Every number I have is from the listing agent (commercial broker). If it were to get serious, there would be a lot more due dilligence!

@Cameron Price Getting the rent roll and the expenses and just do your best to evaluate it. If you want some help personal message them to me and I would be happy to help you go over them. 

@Cameron Price I would start by looking at income and expenses. Get current rent roll and trailing 12 financials or year-to-date financials. 

Expenses are way to low for 70's construction. It also depends on how you will manage it, self managed or management company. 

It does seem like it could have potential, but you need a lot more information. I would be interested in checking this out and providing any help I could

Medium screen shot 2015 08 11 at 5.23.17 pmJohn Cohen, JC Property Group Inc | 5162683500 | http://www.jcpropertygroupinc.com

@Cameron Price make sure you ask for "actuals" and not the expected numbers. On the surface it sounds like it's worth looking deeper into. Don't forget to include taxes and consider if you're buying at more then it was purchased for last time that the city/state will want to raise your taxes. 

Good luck.

Expense figures i listed came from the 2013 "Proforma"  What keeps a seller from artificially inflating income and decreasing expenses on paper?

Originally posted by @Lance Wakefield :

@Cameron Price Getting the rent roll and the expenses and just do your best to evaluate it. If you want some help personal message them to me and I would be happy to help you go over them. 

 Thanks Lance. It's nice to see others willing to help!

Originally posted by @John Cohen :

@Cameron Price I would start by looking at income and expenses. Get current rent roll and trailing 12 financials or year-to-date financials. 

Expenses are way to low for 70's construction. It also depends on how you will manage it, self managed or management company. 

It does seem like it could have potential, but you need a lot more information. I would be interested in checking this out and providing any help I could

 Check out the proforma if you don't mind. What looks too low on the expenses? 

Originally posted by @Jeb Brilliant :

@Cameron Price make sure you ask for "actuals" and not the expected numbers. On the surface it sounds like it's worth looking deeper into. Don't forget to include taxes and consider if you're buying at more then it was purchased for last time that the city/state will want to raise your taxes. 

Good luck.

 The tax tip is a good one. It sold for around $2.2 mil in 2007 and $1.9 mil in 2000 according to the tax records. 

@Cameron Price as others have suggested you can't determine value based on proforma. Get actual results. Trailing 12 (monthly operating statements for the last 12 months), and then 1-2 additional annual statements. 

Also get a current rent roll. After you get those two post back here, lots of us are happy to help. 

Also, FYI, this does sound like a potentially attractive deal but you need to look at actual results and not projections. 

Derek Carroll, NorthMarq Capital | [email protected] | 315‑558‑8332 | http://www.realestatefinanceguy.com

@Cameron Price is the expenses they are missing:

turnover cost

repairs and maintenance - on 70's construction ($400-500/unit)

on 72 unit you might want 1 full time maintenance man 

I would use the conservative number, not knowing where this is, of $3,800-4,200 a unit in expenses.

Medium screen shot 2015 08 11 at 5.23.17 pmJohn Cohen, JC Property Group Inc | 5162683500 | http://www.jcpropertygroupinc.com

Another suggestion when digging deeper into the numbers- ask them to supply the last 2 years of tax returns. If they think you're a serious buyer- the broker or seller should provide them. You may find the actual numbers are way off from those provided by the broker.
Steve Kachmiewicz - I think you are missing the bigger picture. Is spending money to raise each rent by $100 worth it? Well that depends. One way it would: 500 to 600/unit/month gives you 20% more income on the property. If your expenses stay the same. More net income =greater property value. A $2 mill property value then goes to $2.4 mill value (20%increase). Enough equity that you can refinance with the bank. Pull out all the money you made for upgrades, the rent increases pay for the added mortgage and put more $ in your pocket.

Only a real estate agent would send an investor projected income statements from 2 years ago. SMH

Account Closed LOL, I saw that, too.  Pro Forma is latin for 'the form it will take.'  Gave  a Pro Forma for 2013. Not even what actually happened.  Nice!

How does one even present that information with a straight face?

"Here is what we were hoping for... 2 years ago."

Kidding aside, another number missing is collection loss.  Sometimes people don't pay!  It goes right below gross and is subtracted with vacancy to get effective gross income.  Cheers!

Account Closed "Here is what we were hoping for... 2 years ago."

That cracked me up. Is this type of misrepresentation of information standard for listings like this?

These numbers are less than useless. As stated, you need to look at the YTD and 2014 figures, at a minimum, to really get a feel for how this property is operating.

The provided numbers show a 41% expense ratio, which is low. A property like this should be in the 50-55% range with efficient management, but it's not uncommon to see a higher ratio.

For a property that needs work, is $36k/door the norm? Seems high for a property that's only generating $500/month in rent.

Thanks for all the input so far. I just requested actual income and expenses for 2014 and whatever is available for 2015. Will update when I have more info.

Originally posted by @Aaron Mikottis :

@Aaron Mazzrillo "Here is what we were hoping for... 2 years ago."

That cracked me up. Is this type of misrepresentation of information standard for listings like this?

I don't believe this is typical. I've analyzed lots of commercial deals and I never saw anything like this so I'm not sure why the data is old. The OP didn't specify if it is listed or not and how he found out about the property. Since he has a 2013 pro forma, it sounds like it was listed at one time, maybe back in 2012 or early 2013 and that is how he obtained that information. Don't know, but it is absurdly silly to even be looking at that data.

The only pro forma you should ever consider is the one you build yourself. I wouldn't even waste my time looking at something a seller or an agent handed me. At the bare minimum one should be skeptical. I'm not interested in fairy tales. I want hard data. P&Ls can be manipulated so it is best to obtain the schedule E for the last few years. That way you can see any trends and reported income and losses. But I'm no commercial real estate pro. There are much more knowledgeable people on BP with way more experience than me when it comes to buying commercial rental properties.