52 Unit Apartment in Austin

11 Replies

Came across an off market apartment deal in North Austin, can't decide if I should do my first multi at a C-class complex.

52 units, (26 1/1 units and 26 2/2 units). 2 story buildings built in 1969.  Pool, playground, property mgmt on site.

From P&L:
Gross Rent Income  - $492k
Gross Total Income - $554k

Total Expenses - $320k

The owners will sell at $2.5M

Researching the area, it's definitely not the nicest area of town, but it isn't the worst in Austin either. C class for sure, surrounded by other apartment complexes next door on either side.

It's in North Lamar area of Austin if anyone is a local and can give me insight.

The only thing that scares me is that it last traded in 2015, which is pretty recent.

Price per unit at $48k seems really low even for the not as hot parts of Austin.

Am i just being too scared? Sellers are asking for LOI

9.3 cap in Austin is a VERY good deal. I'd check on deferred maintenance though, as well as if those are actual number or pro forma.

Last thing you need is "well those were market rents, the total income CAN be $554k but is currently $400k", or end up needing a new roof.

@Gagan P. Thanks for the insight. I will definitely be checking deferred maintenance during the due diligence period and most likely there will be some needed.

It's definitely not 100% turn key, there are most likely some renovations I can come in and value add, especially in the exterior and extra security to make the residents feel safe as it is a C class area.  Also a few reviews on google shows the mgmt company may need a shakeup I already budgeted about $250k for this, and the cash on cash returns can still hit 8-9%

Financials are from the actual 2017 P&L so that's not an issue on pro-formas. The actuals are showing 57% of gross income as expenses so I dont think they are fudging numbers either

@Adriel Hsu Do you have detailed pro forma that breaks out vacancy rate, economic vacancy?  Do you know the vacancy rate for the market? Without that you can't even decide how to value the deal.

@Adriel Hsu that 57% expense ratio is high too and sounds like it gives you some room to improve NOI. Typical apartments are around 40-45% so there is room for operational improvement. Try to identify what is causing that higher OPEX %.

The reviews on google for any apartment are always bad so don't give too much credit to those.

Other things to consider: Look at historicals, is it at an all time in terms of occupancy? Lower than normal? How does it compare to market? don't be afraid to call up apartments nearby and ask them what they are occupied at. I do it all the time for my day job (CRE lending). What is driving their other income of $62k? On-site washer/dryer? Fees? Pet rent? Make sure you understand these items.

Talk to seller's and try to understand why they want to sell. Ask about large CAPEX items and when they were last replaced. Call insurance brokers to see how their current rates compare to what you can get.

Feel free to PM me.

"The only thing that scares me is that it last traded in 2015, which is pretty recent." Don't worry about that, they could be trading up to a larger MF, you never know. 

Focus more on the due-diligence after the LOI. Pay to have professional inspectors, pluming, electrical, etc... It's better to walk away with 2 to 4k lost then buying something you thought was a good deal. From 1960s to 1970s contractors were using aluminum wire. Verify if the wiring is copper or aluminum. If aluminum, have it check to see if it up to code.

One of my investment friends didn't have the main plumbing lines check during due-diligence and later found a major issue, it cost 40k to fix. On a small 60 unit, that was a huge lost.

Get a team together and walk (inspect) every unit and check every lease.

@Bill F.

Current Vacancy on the unit is 5.8%, it was also at 5.8% vacancy a year ago
Competitor vacancy rate at 4.4%
Submarket vacancy rate at 7.8%

I still assumed a conservative 8% vacancy in my analysis

@Charles Kennedy It is a C class complex, so I wouldnt be surprised if it sits at 50% expenses. 
For 2017, under Admin, Accounting expenses was $8800, "Other professional fees" was $4600, Copier/Printer rental was $2000,  Payroll was $52,800, Management Fee was $27,700, Gardening & Landscape was $6900, Pest control was $8,200

Great ideas of calling up other apartments for occupancy, will do.  The bulk of that extra income is RUBS. Bill back on Pest control is $1500, Trash Bill Back $5000, Utility Bill back $2400, Water billback $38,000.  Also, late fees are $6700 of it. which isnt a promising sign

I was going to look at large CAPEX during due diligence phase more in depth for sure.

@Dave Chapa good tip on the electrical wiring. Will definitely keep in mind during due diligence

@Adriel Hsu Even though, it's class C, your expenses still shouldn't pass 50%. Your R+M will likely be higher than an A/B, but I don't think it's unreasonable to get under that. I'd try to talk to existing operators in the area and ask them their opinion on OPEX. Organize your expenses on a per unit basis for them to take a look over. I'm not sure why pest control isn't being 100% reimbursed... Copier printer rental could be slashed. You can buy one for $2k... probably cheaper from someone going out of business. Mgmt fee is at 5%, probably reasonable for a "smaller" apartment.

Best of luck.

@Adriel Hsu I'm actually down in Austin for the next month. Let me know if you need someone to go scope the area. I used to live up that way.

@Charles Kennedy if the management fee is at 5.6% and the payroll is running at 9.7%, wouldnt that make my total property management at over 15%, and I should be around 10%?

Originally posted by @Adriel Hsu :

@Charles Kennedy if the management fee is at 5.6% and the payroll is running at 9.7%, wouldnt that make my total property management at over 15%, and I should be around 10%?

It depends who is on payroll. Most Property Management companies when there is a Repair & Maintenance issue, the either call someone to fix it and pass the bill onto you or they have a team of handymen/contractors that they will send to fix the issue and, depending on your agreement with them, bill you for it. 

So, if the payroll cost is for an Admin/Lease agent, you probably have duplicated costs between staff and PM fees; however, if they have a maintenance guy, landscaper, etc. on their payroll, you can’t assume the costs are duplicate. Other issue is whether you can reduce those expenses by managing the building more efficiently. 

@Adriel Hsu I think you'll need clarification on that from the seller. If the payroll is for the property manager, then yes, it's far too high and you generally just pay a fee and the management company pays the salary to their employees. However, it could be for an on site handyman or full time cleaner/janitor. I think payroll and contract services can sometimes pay for the same things on different properties, dependent on whether you have someone full-time or not.

Also management fee is based on expected gross income (EGI), which includes other income, not just rental income. so $27,700/554k =5.00%.

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