Offer was just accepted on my first deal and I am getting cold feet. Can you wise folks double-check me, please? Here are the details:
8 unit complex. All 1 Bed/1BR units each renting for $400. Comparable rents in the area are $450-650. There is much deferred maintenance and I believe rents could be increased to $500 with minor repairs/updates. Still, current projected rent is $3,200/month.
Current owner (in keeping with the deferred maintenance theme) has very few financial records but does prove up the following actual numbers:
-Property taxes, $1,900/year
-Owner-paid utilities, $3,429/year
-15% for maintenance/repairs, and
-Reserving $700/month for CAPEX
BOTTOM LINE is $34,560 net rental income less $24,700 expenses = $9,900 NOI.
Offered $95,000 with $10,000 reimbursed at closing for immediate CAPEX (roof and A/C units). 20% down, loan on balance ($76k) at 6% for 30 years.
Cap rate with $400/month rents is 10.1%, cash ROI is 20.3%, and annual cash flow is $4,400. I know that's only $45/month/door but, again, I believe rents could be raised. Once I get them up to $500, cap rate becomes 16.7%, cash ROI is 49.9%, and annual cash flow is $10,916 ($113/month/door).
Are my estimates way off? Will raising rents to $500 be easier said than done? Am I missing anything?
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@Scott Walsh At first glance you hang your hat on raising the rents. Can the market support that and how long can you go until you are full transitioned to the new rents?
For a property with "much deferred maintenance", you sure have a low CapEx. I'm not sure what capital improvements you can make for $8,400 a year. Are you bringing other CapEx funds to the deal or are you planing on using the cash flow to make major repairs?
Can you bill back utilities?
Not that I have a crystal ball, but I see a cycle of more CapEx/maintenance than anticipated for longer than you thought that eats into your cash flow and keeps you from updating the units, which keeps you from maximizing rents.
Over all not a bad plan, but you need to stress test it and see if it holds up to Murphy's Law.
I would be more concerned about the type of tenant than about the numbers. In my experiance those folks renting 400 apartments are a Pain to work with.
Is this a C- or D+ property
If you are confident in your numbers and that the $10k back at closing will sponsor the improvements need to begin raising rents then you shouldn't have cold feet.
You may have some difficulty raising the rent $100 out of the gate but then again there may be some tenants you would rather move out...If you are happy with the current tenants I'd look for a way to stagger or amount...not all at once.
I believe you are going to have turnover after turnover with these types of units.
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