10 unit apartment, is this a good deal?

[Maggie Hawley]

Happy Sunday everyone. I came across a 10 unit apartment building for sale in a smaller city in Kansas. This area has several factories in the area that support the community. Each unit has 2 bedroom and 1.5 baths. I am considering offering 400,000, it is a bank owned property currently. They are asking 600,000 and it has been vacant during the sale as bank owned property for almost two years. They haven't lowered the price in over a year at this point. There are no records from any of the previous owners as to the prior income on the property. The apartment need the basics, carpet, paint, cleaning and minor repairs as well as replacement of a few ranges. I'm figuring about 50,000 to get the apartments ready for rent. These units are all metered separately. The realtor I'm dealing with has a management company and he said he would charge 10 percent of the rent per unit. Rent has been estimated at 400.00-500.00 per unit and property insurance is estimated at 8700.00 a year. Turns out, part of the building is located at the end of a flood plain which adds an additional 4000.00 a year in insurance totaling the 8700. It is very hard for me to value this apartment because it has no income. I would appreciate any input as to whether this seems like a good deal or am I just spinning my wheels? Thanks so much, Maggie

[Oren K.]

Maggie,

What the bank is asking is not relevant. As a vacant / non-performing / distressed property the question becomes what will it take (time & $) to stabilize and at that point what will it be worth.

If I take the mid-point of your estimated market rents (get independent confirmation of everything!!!), at full occupancy, the property will generate $50K per year ($450 x 10 x 12). With separately metered utilities, the operating costs might be a bit lower then 50% but really need to understand the condition of the building, age of major systems (e.g. Roof, Heating, etc.) and how long before things like appliances / carpeting need to be replaced in all units.

Assuming it generates $50K / y and expenses run 50%, you are left with $25K NOI before replacement reserve. If you are "all in" for $420K ($400K purchase + 10 x $2K per unit) that is 6.5 CAP. That may be acceptable for a California property but I suspect you can do much better then that in small city / Kansas market. There are many major markets in the mid-west where quality properties generate 10% or more so your $400K should generate $40K if not more.

If this was a "Class A" property, with a solid history in a major urban center, perhaps but otherwise - too much money for too little quantity / quality and too much risk as you are far away depending on people you have not done business with before to look out for your best interests (unlikely at best).

Good luck,

Oren