what to offer on a 10 unit

Question

Any thoughts on the numbers here please let me know.  Rents are very low. A widow has owned an managed it herself for 10yrs and hasn't raised the rents in about 5yrs.

Ok here is the deal:

All brick 11,100 sq ft 10 unit

10- 2 bedrooms

$630k asking price

Taxes-17.5k

ins- 3k

maint-10k

water-2k

Vacancy avg(5yrs) 2%

Income:

Rents-76,600

Potential rents(market value)-84,000-87,000

Laundry-2,000

Deferred main:

roof in the next 5 yrs(aprx 25-30k)

Thanks

Justin

Account Closed · Answer

Being 80 has nothing to do with anything.  Owning the property since 1972 has nothing to do with anything. I have never once had a seller say their current or past tenants were paying at or near market rent.  Not once.  They ALWAYS say they are undercharging.  They always say they could get more but have a reason why they are not.  Please.

Getting market rents is not simply a matter of raising the rents.  Landlords with deferred maintenance and poor quality tenants are the most likely to have under market rents.  For a reason. Tread carefully.  A 40 year old property not diligently maintained and updated will have a ton of stuff about to blow.

Aaron Montague · Answer

@Justin S.

At asking price the place is going to cost you about $440 to own until the roof is fixed.  Then assuming a 30k roof that you save up for 60 months on, you'll get about $60/month in profit.

Here are the numbers as I see them at asking:

Closing Costs: $14k

Down Payment: 30% (standard commercial)

Mortgage Rate 5.50%

Length of Mortgage in years 30

Monthly Mortgage payment $2,503.95

Taxes $1,458.33

Sewer and Water $169.17

Trash $-

Heat/Utilities $88.00

HOA $-

Cap Ex and Ops $1,333.00 (this is your 10k number plus $500/month to save for the roof)

Insurance $250.00

Mgmt Fee $654.93 (include this number even if you intend to self manage because someday you won't want to do it any more)

Vacancy $530.50

Total Expenses $6,987.88

Total Revenue $6,549.33

Cashflow/month $(438.55)

Cash on Cash Return -2.59%

I'd need to get this place to $244,700 to meet my ROI number alone.  It doesn't get to my $125/door/month number until $205k.  The maintenance budget is eating this place alive.  This is the number that makes the least sense now that I look back.  For 10k/year the place should be in amazing shape with a cleaning crew and landscapers.  Is it?

Ryan Pemberton · Answer

K.  marie P.

More good points. :-)

I know zero about that market but here in southern Indiana, those numbers he gave wouldn't work. Maybe appreciation is high, though.

Personally, I find the numbers hard to swallow. It seems to me like you could end up upside-down rather easily given the right series of unfortunate circumstances.

Ryan Pemberton · Answer

@Aaron Montague and

K.marie  P. both pose excellent points and questions.

At first glance, the asking price seems on par (maybe a little high) if the building was in excellent condition and the rents were where they're supposed to be...but neither of those things are true.

You can use her undervalued rents as leverage in negotiation.  Base all of your numbers on what she's currently getting..not on what they "might" be if they were at market.

Definitely double-check those water bills and vacancy numbers.

Good luck with it.  Let us know what you learn and offer!

-Ryan

Justin S. · Answer

I bet it goes for about 550k.

I agree with most that the rents need to be higher.  I have property in the same area and the rents are grossly under market.

I'm seeing it Monday.  Should be interesting

Aaron Montague · Answer

This place is probably worth 270k with your new numbers.  Given the probably lack of maintenance, I'd make sure you are ready to spend another 20k+, not including the roof, in the weeks after closing.

I'd be ready with another 5k per apartment when the tenants move out after you try and raise their rents.

Justin S. · Answer

That is my miscommunication.  That 10k is me taking 15% out for main/vacancy   and with 2% supposed vacancy its 13% main.

Their main numbers were $4400

As for the rents being low.... she is about 80yrs old and has owned it since day one

it was built in 1972

Account Closed · Answer

That's why I'm suspicious of all the other numbers.  Is that $10K just maintenance, or is capex as well?  Does it include gardeners and snow removal and parkling lot maintenance?   Public area cleaning and maintenance? I just don't buy that the landlord with long term tenants at $650/month is maintaining it to that degree.

Account Closed · Answer

It's child's play to rip apart these kinds of numbers.  In general, I'm not a fan of rents under $700, so I am already biased.  That being said, this might be that deal in a 1000 where the seller has a great, cash flowing property in great condition, and is just ready to get out.  Have to always be ready when it appears.  But you need real numbers or a real discount to make up for the risk.

Account Closed · Answer

If the seller has years of actual documentation on rents and expenses, she may be able to get close to her price.  I'd focus on condition. Could be a stellar property but I somehow doubt it.

The water is $16 per month per unit for 2BDRs.  Seems rounded off in the wrong direction. What about landlord paid water to the laundry area and exterior?

If this is a real offering and the seller and agent are serious and are not just dreaming, they have real numbers with documentation.

what to offer on a 10 unit

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