9 Unit Apartment Analysis

[Daniel Miller]

I am looking to make an offer on a 9 unit in my farm area and I need a little bit of advice. It is in a B- part of town that is quickly transforming into a sold B and potentially a B+ in the future.

The asking price is $560,000. It seems way to high and I am going to make an offer based on an 8.5% Cap Rate. Apartments are very competitive where I live.

These are the Operating Expenses she gave me:

Potential Gross Income: $69,540 - 10% Vac Loss = $62,586

RE Taxes $6,587

Insurance $6,087

Maint and Repairs $1,800

Utilities $5,160

NET OPERATING INCOME $42,952

Obviously, these are way off and she does not operate the property with only these expenses. I have seen a Jamaican gentleman running some different properties for her. His pay was not included in the operating expenses.

These are my adjusted operating expenses.

Potential Gross Income: $69,540 - 10% Vac Loss = $62,586

Operating Expenses: $29,774.82

- RE Taxes $6,587.52

- Insurance $6,087

- Utilities $5,160

- Maint & Repairs $5,850

- Replacement Res. $1,800

- Mgmt. Fee $4,381.02

NET OPERATING INCOME $32,720.46

Cap Rate at Purchase Price - 5.84%

I am planning on making an offer of $384,946.58. The property has been listed since May and does not have any solid offers. She is willing to hold the mortgage if I put down 25%. If I get the property for $420,000 (roughly an 8% cap rate) and after the closing the total comes to approximately $432,600, than I will have a monthly payment of approximately $2,100. The annual debt service would come out to $25,200. Cash Flows before taxes comes to roughly $7,500.

I have to borrow the down payment from my parents. They are cool with it but they want 7.5% and will treat it like an equity line that resets monthly. The management fee will be my compensation. I am a property manager for a prominent family in the area and have two years of experience managing another 9 unit property.

I believe I can get the Potential Gross Rents up to $76,000 relatively quickly and also will install two washers and dryers and will rent out the three empty garage spaces. (I might frame in the garage spaces and rent them out as storage units) Either way there is equity in the property that is not being tapped.

The utilities are high. Electric is separately metered, water is not. The 9 unit I am at averages $3,600 annually in utilities.

Also, the insurance looks high as well. I will get that reassessed and will hopefully find a cheaper rate.

Any criticism will be appreciated! Thanks