Help Analyzing a 14 unit apartment

[Adriel Hsu]

Hello, 

I have a 14 unit deal I am looking to purchase, but a few things are making me hesitant so I’m reaching out to BP for opinions. 

See the 3 things after the financials 

Purchase price: $390,000 

I can get financing at 25% down, 5.5% amortized 25 years 

Per seller: 90% occupancy or higher since they owned in 2002 

8 - 1 bed/1 bath at $550 per month 

6 - 2 bed/1 bath at $650 per month 

*One of the 1 bed/1 bath has an onsite manager/handyman living for free so there is no property mgmt costs in the expenses* 

Owner pays water and trash 

2017: 

Total Operating Income: $79,989.50 

Expenses: 

- Lawn Maintenance: $1,800 

- Water: $6,816 

- Trash Collection: $1,740 

- Pest Control: $820 

- Supplies: $4,280 

- Repairs: $9,852

- Insurance: $4,153

- Property Taxes: $10,515

Total Expenses: $39,976.82

NOI: $40,012.68

2016: 

Total Operating Income: $83,154 

Expenses:

- Lawn Maintenance: $1,800

- Water: $5,820

- Trash Collection: $1,680

- Pest Control: $604

- Supplies: $6,639

- Repairs: $9,910

- Insurance: $4,153

- Property Taxes: $10,521

Total Expenses: $41,127

NOI: $42,027

So if I'm all in at $115k (down payment + closing costs), assuming 40k NOI, i'm looking at 16.4% cash on cash with one unit vacant at current rents (without anything set aside for capex however)

WHAT WORRIES ME: 

1) No washer/dryer connections AND no laundry facility on site (would have to build a new building and run new plumbing to add one). So tenants have to drive to a laundromat to do their laundry This wouldn’t be such a big issue until.. 

2) Rents are higher than nearby apartments. I comped 3 other larger apartment complexes in the same area that have amenities such as a pool, carports, and laundry facility on site, and their 1/1’s are at $500 and their 2/1 is at $600. Thats a large discrepancy considering the amenities they have. 

3) It’s a C class property in terms of location and building itself. Location wise, it’s one block away from the zip code zoned for the good schools, so it’s not in a dangerous and bad area and It’s very close to a popular small strip mall/shopping center and grocery stores, BUT it is zoned for the same terrible schools as the more dangerous parts of town. Appreciation/rent increase “as is” are not going to happen.

New underwriting at the same rents as the other apartments and assuming a 85% occupancy, and budgeting $300 per unit per year for CAPEX, my new cash on cash is 9%. Still good but for a C class? Maybe not worth it. Thoughts?

I was able to go through county records and saw they bought it for $220,000 in 2002. 

New roof out on in 2015. Run by a brother and sister who live 4 hours away so they aren’t the most efficient management even with the on site manager/handyman. I live 25 mins away

[Dustin Beam]

There are quite a few similarities, from what you have shown, to what my last properties were like. I think those expenses look reasonable too based on my experience (take that for what it's worth and justify those numbers however you feel is best).

As far as rents go, have you seen the leases? 

If so, how long have tenants been there? Have you seen any background check info? I ask these two so you can verify that they weren't filled quickly with bad tenants at higher rates to get a high sale. 

This is what I'd do, ask the seller for their Schedule E on tax return for the past few years. If that backs up what they show, I personally would trust it. People don't generally like to OVER state their income. 

Good luck!