7 unit apartment building in a very desirable area right next to a local university. The property is 100 years old. New roof. Windows have been replaced. The building is in working condition but lots of small repairs needed, all units are tenant occupied. Heating is for whole property. Right now owner pay for heating cost but if I buy it I will divide cost and have tenants pay their share.Kitchen and bathroom are functioning but old. Some toilets are loose. Outside brick wall need to be re-pointed which would cost around $50k. Electric are fused based and need to be upgraded at some time, which will cost $17k.
No cash flow first year. Second year hopefully I can get the heating cost as positive cash flow. Then hopefully I can raise rent and get more cash flow...
Total year rent: $77,040
Property Management 8% $6,163
Vacancy 5% $3,852
Taxes & Rental $12,676
Repairs Residential $3,500 (actual, according to seller)
LL Electric and Gas(Common) $7,308 (mainly heating, which I hope to have tenants pay)
LL water $1,878
CAPEX set aside $4,800
Other expense $1,500 (actual)
NET OPERATING INCOME $31,107
Capped rate 4.91%
Cash From Buyer 25.00% $160,000
First Mortgage $480,000
Closing Cost estimate $20,000
If I understand the numbers correctly, if you were paying all cash for the property (which I realize you are not), you'd be earning less than 5% on your money (NOI/Price).
Not to mention that you have an old building with some pretty costly deferred maintenance issues (re-pointing the brick, electrical is old, heating is not separated) that will cost you tens of thousands of dollars over the next several years.
A low single-digit return on a property with lots of Cap X upcoming doesn't exactly get me excited. Maybe I'm missing something or maybe you're operating in a tough market where deals are hard to come by but if you're outsourcing the property management anyway, you could in theory invest in any market. There are better returns out there.
I would hold out for a better opportunity...your homework looks great but the numbers at the end could be better somewhere else. Going through this deal with a fine tooth comb like you have will only allow you to be more sure when the "right" deal comes across your plate. Just my opinion, thanks for sharing!
@Michael Yan I don't want to buy at that low a cap rate. What happens when cap rates return to long term average levels. You will have to increase the NOI just to break even on equity.
What rate is the financing. If it is above 4.91% you have negative leverage. That is generally a bad idea.
Is the $640,000 price include the repairs needed? if it doesn't you are fooling yourself with the calculations. You should figure your returns based on the all in price not just the contract price.
Thank you everyone! I was struggling between emotional liking of the property due to great location, and the rational understanding of low NOI. Your comments cooled me down and I am firm this is a no deal. Afterall this is investment, but a hobby.
Just told my agent to look for other opporutnities.
I know this market is very hot. Someone else probably will buy the property at the price. They probably will do PM themselves, to at least earn the 8% PM fee as their cashflow.
That works out to 90k per unit with a monthly rent average of 916 per month per unit. Unless there is another big piece of the puzzle that I am missing- this isn't even close to being a deal in Baltimore.
Originally posted by @Michael Yan :
I know this market is very hot. Someone else probably will buy the property at the price.
Patience young man. This deal is not over. You can buy from that fool when he goes bust.
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