All studios apt building purchase?

Question

There is an opportunity to partner with a few others to purchase a 24 unit apt building but all the units are studios. Does anyone have any experience with these types of building? Is there a high turnover of tenants? Is this type of building very time consuming? Is it generally a good investment? Any information would be helpful. Thanks rob

Derek W. · Answer

I really like my studio units. There are specialty niches of tenants that you can really create a neat dynamic with and feel like I am really making a difference in people's lives. It's definitely a lower income niche. I joke that my studio units are the last stop before homeless. But I have found that there are sadly a seemingly endless supply of single seniors living on social security that can't afford much else. They make great tenants. I don't have any more turn over in my studios than I do in my single family rentals. I also have partnered with the local county programs for adult mentally handicapped tenants. Your check comes directly from the county if you have a service like this in your area. So don't assume that studio rental units always mean ghetto grade tenants.

Rob Shah · Answer

Thanks for the information everyone. All of your are very valuable. ;). I didn't realize you can call the utility companies to get information on a prospective property purchase. Is it public info? Or another way about it to go usage and cost information? Thanks, Rob

Bill Gulley · Answer

Students? My take, the townhomes across the street are 2 maybe 3 bdr, the students share the rent over there. Students generally seek the best deal, are social little creatures and some like to party. Studios are cool, but usually only has one tenant. Your market defines who they likely are. I stayed in a studio apt in Virginia across from DC and Arlington, I think it was about $1,500 a month per unit and it was full (Govt paid mine) so it depends on the niche market. You won't really know what the value can be without knowing the micro market of that immediate area. Students, professionals, corporate rentals, singles, lease to a non-profit for homeless or low income or transits or victims of abuse or health assisted clients, housing authority spill over.....the list goes on. The makeup of your target market will define the use and reputation of that building. Look to that target market to serve. Jean, the scavenger service might be picking up beer cans and wine bottles, then sorting aluminum and glass! Just thinking college.... :)

Jean Bolger · Answer

And to answer your original question: Studios wouldn't be my first choice, but there are a lot of factors to consider, so I wouldn't write it off out of hand. Seems like you're in a pricey area, which probably means high demand for cheaper units. If there's not a lot of other cheap housing nearby you could end up with an easy supply of tenants. If there's a lot of similar buildings around and they seem to have vacancies I would more likely pass though.

Jean Bolger · Answer

They don't seem to be accounting for management fees, better look at least 10%-15% for that (PM companies might tell you 8%, but add in the fees for turnovers, evictions, etc and it will likely be over 10%). $400 for snow seems pretty low for that part of the world. BTW, what the heck is "scavenger service"? I'd call the local utilities to confirm costs on gas, electric, water

Rob Shah · Answer

Here is the expenses reported. Should there be other expenses not listed here?

Patrick L. · Answer

That NOI is inflated, I bet it's no more than $80k when you figure in all expenses as well as reserves and management. Is the owner paying any utilities? If so I bet it's even less than that. Studios are fine but you will have more turnover than an average place. People that have very little stuff or money tend to disappear in the middle of the night. These are also people with very limited income so they may not have any savings if something goes wrong. All that being said you will have a product that's cheaper than most others on the market so vacancies tend to fill fast with people looking to move in immediately (because all of their belongings fit in the truck of a cab).

Rob Shah · Answer

Thanks for all your response. SO here is the story...the selling price is $795K with 23 studios and 1 laundry room/mail room. It has its own parking lot. 2 units are currently vacant but i reviewed the previous owners rent roll and most the leases are due to terminate next sept/oct (that is a bit suspect, right?) and a few month to month. The place has a maintenance person who lives in the property. The complex is by a community college but only 2 units are occupied by students. There is a "For Rent" sign across the street on a townhouse it seems like. Gross annual rent is $162K with a net operating income of $102K. Does this sound like a good investment? Thanks soo much for all your input! :)

Karen Margrave · Answer

The questions are, what is the area like that the apartment building is in? Is it in a high rent area where larger apartments are hard to come by, or in a low rent area where people can't afford rent? What's the local economy? Are people working or on unemployment? How old are the units, what are the costs to own and purchase price? How will the money be split? is it a buy hold or flip?

Aaron Montague · Answer

As a renter, studios suck. But they are cheap, so they have that going for them. I'd look at it like any other multi family deal with 12% vacancy figured in. Maybe a bit less if you are near a metropolitan area with young professionals. Your property manager is going to be REALLY busy. I doubt you'll see too many renewals.