15 units- Foreign to me. Is this a good deal? - Posted by SCook85

Posted by JPiper on April 15, 1999 at 11:51:53:

I would be working with an estimated NOI of $4180 per month. This reflects a 5% vacancy and bad debt factor and 40% estimated expenses including set asides for deferred maintenance.

You say that payments on the existing first are $4200, and the interest rate is 9 ½%. What you don’t say is whether this payment is PI?or whether it includes perhaps taxes and/or insurance. Or perhaps it is amortized over a shorter period than 30 years. If however it does not include taxes and insurance, your seller is not experiencing positive cash flow?.he may just think he is because he is not reflecting set asides for future deferred maintenance. If the payment includes taxes and/or insurance then it’s a different matter.

On the surface I’m not seeing a spectacular deal here. But if your goal is to put some cash in something that pays an acceptable rate of return, then this may be something to pursue.

JPiper

15 units- Foreign to me. Is this a good deal? - Posted by SCook85

Posted by SCook85 on April 14, 1999 at 20:17:51:

As many of you already know I intend to start purchasing properties to hold. I came across a 15 unit complex today that appears to be a good deal but this is definitely not my area of expertise. I want to just come in and make a lowball all cash offer, but I’m sure it won’t fly on this case; so I’m seeking your help.

15 units in a very good part of town. 11- 2BR units and 4- 1BR units. The monthly cash flow is $7600. No vacancies right now. The property is in very good condition. There is separate utility room with quarter operated washers and dryers to generate more income. Parking lot is clean, and the bus stop is right at the entrance to the complex.

They are asking $450,000. Currently there is a $360,000 first mortgage which is assumable but balloons in 2001. Payments on the first are $4200.

There is a realtor involved who has to get paid his comission, and the seller will hold some paper.

That is all the information that I have at this point.

Does this seem like a deal worth pursuing? If so what should I be looking for, and does anyone have any ideas as to how I should structure an offer?

Thanks,

SCook85

Re: 15 units- Foreign to me. Is this a good deal? - Posted by phil fernandez

Posted by phil fernandez on April 15, 1999 at 09:49:17:

Hi Steve,

I like the fact that the apartment complex is in a good neighborhood and the busline runs right in front. Also I like the fact that the property is in good shape. that combined with the good location will go a long way in attracting good paying tenants that will want to live there.

I also like the mix of apartments. 11 two bedrooms and 4 ones. The more two’s you have the better.

The balloon scares me a little with such a short fuse. Make sure you have an exit plan for refinancing that balloon. The fact that the seller is willing to participate in the financing is a nice plus.

Make sure you verify all of the expense numbers and include in that figure a reserve for replacement items such as a new roof,painting, carpets, hotwater heaters and furnaces, appliances etc. They do break down and the money to replace them should come out of the cash flow, not out of your pocket.

Even though there are no present vacancies, put a vacancy factor in there. I use 5% but check around your area. Your vacancy figure might vary.

When you get all of the numbers including your offer and what the owner financing payment would be feel free to e mail me so I might help further.

In a nutshell I would say this apartment complex is worth looking into further. The numbers will ultimately tell you what you can pay.

Crash Course In Comm’l Real Estate - Posted by J.P. Vaughan

Posted by J.P. Vaughan on April 15, 1999 at 09:46:24:

Hi Steve,

Jim Beavens wrote a good article on how to evaluate
comm’l real estate. It’s on the "Money-Making Ideas"
page: http://www.creonline.com/mm_28.htm

JP

This is a great property… - Posted by Sean

Posted by Sean on April 15, 1999 at 09:34:17:

…that is getting killed by that 15 percent first trust deed. You said you wanted to make a lowball all cash offer … I’m assuming from that you have some cash. Can you put 10 percent down, ask him to carry 10 percent at 7% interest with payments of $891.09 a month and get an 80 percent first from a bank. Suggest you go for a graduated premium mortgage (GPM), which will have a very low but increasing payment for the first five years while you pay the seller off.

You know what, I changed my mind about that $891.05. Offer him payments of $644.11 a month … that’ll have the entire debt amortized in 90 months.

Re: 15 units- Foreign to me. Is this a good deal? - Posted by Jim Rayner

Posted by Jim Rayner on April 14, 1999 at 23:36:41:

Steve,

i ran the information you have provided thus far and simply crunching the numbers its a little too skinny for my taste but at a purchase price of 360K they would have my attention. Carol asked my next question are the rent at market? Secondly you stated that the building was in good condition, is there any deferred maintenance issues. Using 360K as my base i would then adjust my price upward for upside potential of rental income increases and downward for deferred maintenance issues.

Due Diligence(long) - Posted by Sean

Posted by Sean on April 14, 1999 at 23:15:50:

Suggest you start with some due diligence. Indicate that you are very interested and that you’d like to know the capitalization rate or have copies of the owner’s 1040 schedule E for that complex to determine the expenses. Or you could make your offer contingent upon receiving that information.

Assuming the other lady’s estimates are correct with the 45% expenses that would place your capitalization rate near 11% Considering that you would be getting a bank loan at 7% or so and investing it at 11% you are earning a nice spread.

Suggest you do not assume the first mortgage. It sounds like the mortgage might be at 15 percent interest (4500 payment x 12 months / 360,000 = 15.00 dead on … too much of a coincidence) That would be a bad deal for you – borrowing money at 15% to invest it at 11%

Contact the holder of the first mortgage and see how much of a discount he’ll take for an immediate payoff. It might be nothing, but it can’t hurt to ask. If he would take $324,970.77 (for example) you could get a $360,000 first on the property and that’d free up $35,000, which should be enough for the Realtor’s commission at least.

What kind of resources do you have, like cash, equity in other properties, etc.?

Re: 15 units- Foreign to me. Is this a good deal? - Posted by John Butler(Stl)

Posted by John Butler(Stl) on April 14, 1999 at 23:08:12:

Since I am moving into the larger units as well, I feel I can offer some advice here. As Carol said, I think the current payments would be very tight and leave little for cashflow. It seems like 40-45% for all expenses and vacancy is high, but historically it has been pretty close. Look at the “Crash Course in Commercial Real Estate” in the Money Making Ideas section. This will give you a quick and dirty way to analyze this property. I think if you could get it for closer to the mortgage balance and put a new, longer amortization loan onto it, it is doable. My advice to you is also sign up for the Atlanta conference(if you’re not already) and give Ed Garcia a call as well. He has a delicate :~) way of putting things into perspective on these types of deals(ask him about his deal in Trona.)

Hope this helps,

John

Re: 15 units- Foreign to me. Is this a good deal? - Posted by CarolFL

Posted by CarolFL on April 14, 1999 at 21:10:49:

Steve, As someone said to me about MHP’s vs SFH’s : it’s the same thing - run the numbers.

Generally speaking I think you can ballpark the various expenses ( taxes, insurance, vacancies, etc ) at about 45% to start with. The rest can go to debt service and your pockets.
Using the $4200 figure + approx $3200 = $7400 … oops.

Of course, these are very rough but it gives you an indication. Does the $4200 include T and I or just P & I?

No doubt you will get more detailed responses, but this may get you started. BTW, are the rents at market?

Good luck!
Carol

Re: 15 units- Foreign to me. Is this a good deal? - Posted by SCook85

Posted by SCook85 on April 15, 1999 at 11:37:26:

Thanks Phil, when I get all the numbers I’ll email them to you. The assumable mortgage is at 9.5%, where this 15% came from I don’t know. 11 of the units have been recently renovated, new paint, carpet, kitchens, etc… The roof is an asphalt shingle roof which appears to be no more then 10 years old. The property is obviously well kept.
Rents for the 2BR’s are $525 and the 1BR’s are $465. I think you may be able to squeeze another $25 out of the 2BR’s but not the 1BR apartments. My biggest concern is the types of expenses that I might be missing. The seller has positive cash flow now, and he doesn’t manage the property. It’s apparent that the way the property has been kept up that he is not struggling.
I’ll be getting some more of the numbers this afternoon and I’ll post some more info then.

SCook85

Re: 15 units- Foreign to me. Is this a good deal? - Posted by phil fernandez

Posted by phil fernandez on April 15, 1999 at 13:45:53:

Steve,

Expenses :

property taxes
insurance
water/sewer consumption costs
rubbish removal
lawn care
snow removal
common area electricity
any city/state licenses needed
general maintenance
( calling the electrician, plumber, touchup painting,)
reserves for replacement establish fund for :
( exterior painting, interior painting and new carpet, appliances,roof, sealing parking lot,hotwater heaters, furnaces. )

These are the expenses that I use in my calculations.

And don’t forget the vacancy and credit loss factor.

Also even if you plan on managing the complex yourself, throw in a 10% management fee. You don’t want to work for free.