16 Unit Apt Bldg decision is biggest in my life!! HELP PLZ

[Glenn Hanzelin]

I am looking to purchase a 16 Unit Apt Bldg. at a price of $360,000. The property is decent condition but has the usual BS deferred maintence from the owner not keeping it up to date and making improvements. I estimate these Improvements needed at $35,000. Probably about $20,000 light, but I am willing to take this risk. Things that are needed are HVAC upgrades, and a few cracked heat exchangers (not leaking CO2 yet) Carpets are trashed in 12 of the units, roaches, empty 40's, two pit bulls that need to go. Parking lot tilted toward building, place just needs some good loving.


INCOME

16 units @ $410 per month = $6,560
Laundry per month $250

Monthly Gross Income $6,810

Less Vacancy (estimate) 5% $328

Monthly Net Income $6,482


YEARLY INCOME $76,779




EXPENSES
Taxes 2009/10 $17,068
Insurance 2,604
Maintenance 3,887
Garbage 1,181
Water/Sewer 0
Gas/Electric 4,771
Snow removal/Lawn care 440
Management fee (5% estimate) 3,839
TOTAL $33,790
Expenses are as a percentage 44%

Net Yearly Income (before capital reserves) $42,989

Capital Reserve--4% (estimate) $3,071

NET YEARLY INCOME $39,918

288,350 Amount of New Mortgage

CASH DOWN 27%

106,650
6.50% Interest Rate 0.54%
240 Month's amortized

CAP RATE 11%



$2,149.86 Monthly Payment

Debt Coverage Ratio 1.55

$25,798.32 Yearly Mortgage Payments

Cash on Cash Return 13.2%

Yearly Cash Flow $14,120
Yearly Loan Reduction Year 1 $7,354
Total Benefit Year 1 $21,474



TOTAL RETURN 20%

[Jon Holdman]

Cap rate is just NOI divided by the purchase price. The 50% rule gives you a decent estimate of NOI from the rents. You know the current rents, $410 per month per unit. Use that for your purchase decision.

$410 per month per unit gives you $78,720 a year is gross scheduled rent. The 50% rule tells you your NOI is half of that, or $39,360. Based on the purchase price of $360,000, your cap rate is 10.9%. End of story.

Sure, you can mess with the numbers in a spreadsheet and make the number higher. But a far better way to get the cap rate higher is to get the price lower. That 10.9% cap rate is a better estimate than fooling yourself into believing it will be better.

I went back and looked at your list of expenses again. You show $4771 a year for electric and gas. That seems high for common areas, yet low for 16 units. What is covered by that amount? If you're paying for tenant heat, then your expenses could be higher than the 50% rule.

I also notice a couple of items that make me question the $35K rehab estimate. You mention parking lot is tilted toward building. What's that going to cost to fix? You also mention a couple of HVACs need replacement. Those are likely at least a few grand each.

Be aware that building codes for multis like this are very different than for duplexes.

When you evaluate a deal, look for reasons not to do it. Not excuses to move ahead. When you start pushing expense down, I worry you've already mentally bought the place and now you're looking to justify your decision. At this point in the deal you should be doing your due diligence. That means looking for every reason you can not to move ahead. This is your last chance to find a problem before it becomes your problem.