Apartment complex seems too good to be true. What am I missing?

9 Replies

Hi!  I'm looking for my first investment property!  I found a 6 unit apartment complex that consists of a building with 2 units next to a building with 4 units.  All 6 units are rented out already for a total of $3545 per month.  Here's what I'm looking at to analyze the property:

Price of Property

  • Asking Price: $225,000
  • Negotiated Price: $195,000
    • This is the value I'd try to negotiate for the property since it's been on the market for well over a year and the county assessor has assessed the property to have a value of $172,400.

Upfront Cost

  • Estimated Closing Costs: $5,000
  • Estimated Repairs/Rehab Cost:  $1,000
  • Down Payment: $195,000 x 20% = $39,000
  • Total Initial Investment:  $45,000
    • This is equal to Estimated Closing Costs

      Estimated Repairs/Rehab Cost + 

      Down Payment.  I use this to calculate COCR.

Mortgage

  • Mortgage Amount: $156,000
  • Mortgage Period: 30 years
  • Estimated Mortgage Interest Rate: 4.5%
  • Monthly Payment:  $790.43

Monthly Expenses

  • Taxes:  $331
  • Insurance:  $100
    • This is just a guess but doesn't affect the final numbers very much
  • Vacancy: 3% of rent ($76.35)
  • Repairs: 5% of rent ($127.25)
  • CapEx: 10% of rent ($254.50)
  • Total Monthly Expenses:  $1679.53

The problem is that with that much monthly cash flow, my COCR is close to 45%, and I'd allegedly be bringing in almost $2,000 per month in profit. I feel like I must be missing something because this property has been on the market for so long and not bought up yet. Let me know if you'd like more information.

I have two questions:

  1. Am I missing anything obvious with my numbers here?  Anything else I should take into account or that looks wildly off?
  2. What reasons might there be for this property to have stayed on the market for so long that I'm not seeing?

P.S.  This is my first post - am I allowed to directly post the realtor.com ad for reference?

The price would indicate that this probably a older building.... 1k seems very low repair estimate for 6 units.

Also 6 units is commercial you won't get that low of interest rate or 30 year term. Your insurance will be way more than 100

That Repairs/Rehab cost seems trivial. I'll assume the buildings are in excellent shape, because otherwise that seems low at $1K.

I think your amortization may be off. Here, I could only find bank loans that amortized to 20 years, not 30. That still doesn't mess up your plans too much. 

I'd say insurance is a bit low as well. I have a duplex that I get charged $122 per month. You can probably at least double that one. 

Do the tenants pay all utilities? Gas/electric/water/sewer? 

Otherwise your numbers seem OK to me. 

I agree, something seems odd that this would sit on the market so long. What size is your town? Have you driven the neighborhood? Is it in a decent area? 

3% vacancy is very low. That means if somebody moves out after 1 year you can rent the house within 11 days, a 2 two year tenant within 22 days. You also have not included a property management fee. If you manage yourself that will be "your pay" do manage it, but that way you know what the cashflow will be when you want to step away of the management side and just be the property owner.

Also price history will tell you a better idea of what's up vs the price it's listed at now. Also 30k a pretty steep discount (even more so if price has been continuously lowered) for a property in excellent condition (based upon your 1k est repairs).

Wow - thanks for all the replies!

Since this is really two properties, one with 4 units and the other with 2 units (it's a house and a brick building sitting side by side but listed together), does that still mean it's in the "commercial" classification? I suppose so, right? What if I could get two separate mortgages? I'm going to assume that I can do that for the rest of this reply, just for the sake of practicing analysis if nothing else. Here are my adjusted numbers:

Price of Property

  • Asking Price: $225,000
  • Negotiated Price: $195,000

Upfront Cost

  • Estimated Closing Costs: $5,000
  • Estimated Repairs/Rehab Cost: $1,000 $12,000
  • Down Payment: $195,000 x 20% = $39,000
  • Total Initial Investment: $56,000

Mortgage

  • Mortgage Amount: $156,000
  • Mortgage Period: 30 years
  • Estimated Mortgage Interest Rate: 4.5%
  • Monthly Payment: $790.43

Monthly Expenses

  • Taxes: $331
  • Insurance: $100 $400
  • Utilities:  $600
  • Vacancy: 3% of rent 5% of rent ($177.25)
  • Repairs: 5% of rent ($177.25)
  • CapEx: 10% of rent ($354.50)
  • Property Management:  8% of rent ($283.60)
  • Total Monthly Expenses: $3,114.03
    • This includes my monthly mortgage payment.

Based on these assumptions, this puts me at a profit of $430.97 a month and a COCR of ~15%.  This is assuming I can get the property at a hefty, improbable discount.  If I were to buy the property for the asking price of $225,000, my monthly profit would be $309.37 with a COCR of ~11.5%.

It looks to me like even if I buy the property at the asking price, as long as my other assumptions are correct, this is a good investment.  That being said, I wouldn't buy the property without further investigation into the assumptions I'm less clear about (which is most of them).  A few of these numbers I feel are pretty optimistic, so I'll spend some more time investigating to get them to what are hopefully closer values.

Someone mentioned not being able to get a 30 year amortized loan.  Is that common, or were you referring to a commercial mortgage?  Would it be a potential issue if I were able to get two separate residential mortgages?

Are these two separate but adjacent properties or just one property? Not buildings, the legal description. If these are two separate legals, you could get conventional loans. If only one legal you'll need a commercial loan. You might get 20 or 25 year amortization, but there will be ARM or balloon terms involved. You'll need to talk to local lenders. You're expected rate may be a little low and your downpayment may need to be 25%.

Your cash on cash calculation is incorrect. Your $431 a month cash flow looks correct, and looks reasonable. That's $5172 a year divided by your $56K investment is 9.2% COC. Your cash flow estimate may be a little low, but if these are older building with owner paid heat, maybe not.

Aha, you're right.  I was dividing the wrong numbers.  

I'll have to find out if it's a single property or not.  That would be a deal breaker for me.

Thanks for the help everyone!

Hey @Shawn Reisner just a heads up when replying make sure to type in the "@" button and the name of the person you want to tag. I's just like Facebook or Instagram because if you don't they will not be aware you replied.

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