Need advice on purchasing a 23 unit apartment building.

[Todd Hays]

Hi everyone,I have plenty of experience in 3 family units and landlording and love the cash flows they produce.I'm ready to venture into bigger units but nervous as hell to take the step.So the owner wants 1,3950.000 which is over 60,000 a unit ,2 bedroom units,ave rents are about 822.00 per month.I will be meeting the owner tomorrow to get more info.What is a quick way to gage this property, property has been available for over a year ,when I spoke to him about 7 months ago he want 67,000 a unit.This property has not been listed for sale..Let me know how I should approach this.

[Bob Mason]

Great job on finding a deal where the seller is moving in the right direction!

What is the capitalization rate in the area for this class of building? A commercial broker should be able to give you this info fairly easily. Let's assume it's a Class B property in a Class B area with a cap rate of 8.0. 

Let's also assume 10% for vacancy rate/concessions/bad rent. 

Then I usually use 50% for expenses on this abbreviated first pass, unless the landlord pays electric and gas in the units. Then the expenses would be higher. 

You have $822 a month in rent for 23 units. $822 x 23 units = $18,906

Multiply times 12 to get your Gross Annual Income. $18,906 x 12 = $226,872. 

Then you multiply by 90% for the vacancy rate. $226,872 x 0.9 = $204,184.80. 

Then multiply by 50% for expenses. $204,184.80 x 0.50 = $102,092.40  

Then divide by the cap rate. $102,092.40 / 0.08 = $1,276,155

I would recommend finding out the appropriate cap rate, run it through these numbers, and see where the seller is at with how he underwrote his property to end up at his price. Keep in mind this is a first pass/quickie way to underwrite it. Once you and the seller are in the same ballpark, you'll need to dig into his expenses, rent roll, contract services, property condition evaluation, etc.

Best of luck and much success!