Hi BP! I am a new investor and have been looking for a single family or small multi-family property for my first deal. While looking, I actually came across a 14-unit apartment complex in my area that looks (at least to me) like a great deal. Below are the concerns I have regarding the property.
After looking at the tax records, the property has been sold 5 times in the last 15 years (red flag?). Secondly, each time it has been sold for around $230,000; however the seller is asking $375,000 for it (and from a drive-by I can tell he has not put $145,000 into it). What could explain this large difference in price? There are currently 3 vacant units, so how would that affect the purchase price?
Rockledge, FL · Member since 2016 · 493 posts · 427 votes
9y
Payton,
First off.. commercial property is priced according to it's income generating potential. So, your seller doesn't have to "Put" 145K into it, they only have to raise the rents to get another 145K of value. (looks like about $75/unit/mo might get you there).
5x in the last 15 years is a bit of a yellow flag, especially since it sold for the same amount each time. Why? What part of town is it in? Can the rents be raised? Are the apartments in good shape? To me it sounds like it's going to need some rehab. If your seller has done some, then that is good. 3 vacancies is about 21% which is high. It could be that he is charging rents that are too high for the building, or that he just hasn't rented apartments out yet since they all became vacant at about the same time (Why were they not pre-rented?). Another option is that they are so badly trashed, they aren't in rentable condition. The owner could be doing a bit of rehab on those units, so they are off market for a bit.
Your best bet is to view the building with an EXPERIENCED muti-family professional (Read Investor, Property Manager, Asset Manager etc.) who can look at the building and offer advice.
Jim, thanks for the reply! I definitely got some good information from that. Quick question, how did you arrive at the $75/mo/unit number? Was it 75*12*14 / estimated cap rate = 145k?
The price each time it was sold varied from $257,000 (in 2006 right before the crash) to $190,000 in 2009. Why was it sold is the question I'm looking for, should I call previous owners and ask? It is in a lower income part of town. The rents could be raised but are close to market price. The utilities are paid for by the owner so I am planning on shifting that expense to the tenants which would increase cash flow quite a bit. The tenants have voiced that the landlord doesn't take good care of the property so I would expect a few of the units to be in bad shape. I know at least one unit is being worked on, but it sounds like just the necessities are being fixed. I would love to walk the property with an experienced investor.
Again, thanks for your help, Jim, and I will be writing another post soon with a more in depth analysis of the numbers I have calculated for the property.