Potential apartment building deal....How do I make it work and is it worth it.

[Barima Opong-Owusu]

I'm looking into getting my first buy and hold. After looking for multifamily properties a casual conversation with a coworker turned into the potential for me to buy an apartment building from her relative. Here are the details for the buildind and the deal.

It has 6 apartment units and 3 commerical store front properties. All residental and commercial tenants pay for gas and electricity The income on the property is

Commerical Units: $3975/mth

Apartment Units: $4995/mth Monthly Gross: $8970 Yearly Gross:$ 107,640

Expenses (figures were give by the seller):

-Taxes $11,000

-H2O Bills $3600

-Insurance $7800

-Maintenance $6000

Total Expenses: $28,400

The seller is looking to sell the building for $975,000 with $200,000 down and carry the note for 15-20 years. The monthly payment for 15 years breaks down to $5,830 or $69960/year. Leaving $9,280 as cashflow for the year. CAP Rate of approx 8.6%

After looking at the building I can tell there are lots of ways to add value to the apartment units because they haven't been updated for some time. My biggest questions are does this look like a good deal? And if it is, how would I go about getting the down payment at a cheap enough rate to still have decent cashflow. Private Investor, Convential Loan, Partner, what would be my best route at securing that much money for a buy and hold deal and at that point does the deal still make sense?

Thanks for any feedback.

[Giovanni Isaksen]

@Barima Opong-Owusu We usually run maintenance costs at 10% and in older buildings they're often higher so that expense item looks a little light. Also I would want to see what capital repairs have been done recently. One issue that comes up is that as building owners grow tired over the length of their hold deferred maintenance begins to build up. Since the seller is willing right out of the box to finance the purchase I suspect this seller may be getting worn out and may be sitting on some major repairs or replacements they're hoping you don't spot. I would spend the money to have an engineer do a complete inspection and have them include the expected remaining life of all the major systems, roof, HVAC, etc. in their report.

Another area to look closely at is the commercial leases. Are they gross or triple net or somewhere in between? How much time remains on them? Do they have renewal options? Percentage rent? Understanding and negotiating commercial leases is a whole separate body of knowledge to acquire or hire.

Depending on the terms of the commercial leases and the local apartment market I would build in a vacancy factor to the NOI. The commercial spaces once vacant could stay that way for a long time before a replacement tenant is found, builds out their space and begins paying rent. The seller will claim that the rents are the rents but if you were to finance this property with a commercial lender they would underwrite with a vacancy factor and so you should too.

Good hunting-