Deal or no deal? 24 Units in Washington

[Brandon Turner]

Hey Everyone. My first major deal has come across my plate and although I've read every book under the sun about buying apartments, it is still a big step. I thought if anyone is up for the challenge, they can let me know if this is a good deal or not.

The apartment is 24 units. A friend of mine bought them new 22 years ago, owned them for around 15 years, paid them off, then sold them will seller financing 7 years ago. He is now foreclosing and will take back these apartments in 3 weeks. We have been discussing this for some time, and now I need to decide. He has offered to sell them to me for 580,000, if I can come in with only 25,000 to pay the back-taxes. This is his retirement, and he wants someone he trusts to buy it. The following is the info we have:

24 units (6 4-plexes surrounding a parking lot); average rent 475 per month = gross rent 11400/month, $136,800 per year.

only 17 units are rented (actual rent: 8075/month, $96,900 per year) . the others cannot be yet, due to their condition. The owner stopped caring for the properties 1 year ago, so when tenants moved out, the units were never prepared for new tenants. The exterior needs paint and some small siding repair (which I can do myself) and the parking lot could use some patch work. One unit is gutted to the studs, but the rest just need carpet,paint, etc. If I got this apartment, I would move in for the first year and spend my time fixing the units up one at a time, getting them rented as I go – hoping to have the whole complex online and running smoothly within one year's time. I expect the cost of materials to fix this place up to be around $30,000. So I will need around $55,000 total invested. I plan on borrowing this from either my parents or a partner (if I can find one).

Using 50% rule, expenses (not counting the cost of getting the vacant units rented) will probably end up running around 5500 per month, or 66000 annually. I did a more detailed analysis of expenses, and came up with about the same amount when I include 8% monthly maintenance, 10% property maintenance, and eventual 8% vacancy rate.

So possible NOI could be about 70,000 - so with a 8.5% cap rate (my guess at average in the area for a nice complex) the value could be $833,000 . However, AS IS, with an 8.5% cap and NOI of 30900 the value would be 364,000.

So I know that "they" say never pay for an apartment based on what it "could be" but rather what it is right now. However, my friend who is selling it to me has offered the following option for the 555,000 mortgage payment: first year $2000 per month, second year $3000 per month, and third year and beyond, 7.75% APR which equals out to about $4000 per month. This way, hopefully some of the repair money can be made from the cashflow the first 2 years.

Also to complicate things, the apartments that are renting for 475 would be able to be raised without much trouble to 525. Rents have not been raised in years and 525 is very much market rent - if the complex had the needed repairs and management in place.

So the big question is: Is it worth paying more than its worth because of the relative easy financing, low down payment, and having a step up mortgage for the first few years?

So, that's the situation. From almost every angle, I like it. But maybe someone else has different perspective. I feel like with only needing $55,000 total invested (none of which is my own money), I can own this apartment which cashflows at every step (according to my calculations). Let me know if I left out any vital information!