38 Unit Purchase. $105k cash flow. Good deal?

Question

I am looking at purchasing a 38 unit apartment complex in Maine. Our area is a bit cheaper market than other places in the US. The property is in an excellent location. Right in town and walking distance to hospitals, schools, municipalities. Buildings are also in excellent shape, very well maintained, but all will need roof replacements.

Here are the metrics of the property.

Asking Price $1,330,000 ($35k/unit)

Total Income - $319,500

Taxes - $31,260

Insurance - $14,760

Maintainece - $12,000

Electricity - $20,032

Heat - $22,956

Trash - $2,400

Lawn - $7,200

Snow - $12,000

Water/Sewer - $1,416

Management - Self

Total Expenses - $126,528

Net Income - $192,972

Debt Services - $89,640 with 20% Down, 5.75% Interest, 15YR/20 Amortized

Total Cash Flow - $103,000

DSCR - 2.51

Is this a good purchase?

Also, I am purchasing for 35,000 per unit, but Estimate appraisal will come closer to $43,000/unit.

Mike Dymski · Answer

If the vacancy rate is reasonable, this may be a good one. If the property is worth $10k more per unit, worst case is you simply flip it for a $380k profit (minus selling costs and taxes).Maintenance is too low...need to 2-3x that figure (which will include unit turns).Include a vacancy amount in net income and cash flow...and include cap ex reserves in cash flow...and property management fees even if self managing (may have to use 3rd party management at some point and, even if not, you need to get 'paid' for self management, which is different than investment income).Ensure that the area is fine. $700 per month rent in some areas can be quiet and stable and a war zone in other areas.

Bjorn Ahlblad · Answer

Yes it looks like it can make money. However if those are numbers from the seller or listing you need to get your own. Property taxes, insurance and other expenses-vacancy, delinquency etc. Use Estoppel certs to verify rent payment and deposits. Security deposits and advance rent are your money to be paid on closing. Walk every unit and get a professional inspection. Keep us posted!

Ed Emmons · Answer

The exact address is important in Lewiston. Some neighborhoods will be difficult to collect rents. I went to war with PTL several years ago and they told all my tenants not to pay rent. There was no reason other than they could. So look really close at the whole deal. If you want more info you are welcome to PM me.

Charlie MacPherson · Answer

As a business broker (and former Realtor), I'm looking at this a little differently. Let's assume all of your numbers are correct (Though $579/year per apartment for heat seems very low).From 10,000 feet, I see an investment of $1,330,000 and a cash flow of $192,972 before debt service - PLUS - you're self managing, so you've pretty much bought yourself a full time job. I compare this to other types of businesses. A pizzeria for example (and not very far from Bangor). Asking $325,000 with the owner working and a cash flow of $156,000. Yes, it's also a full time job, but the amount of hassle making pizzas and sandwiches compared to the amount of hassle with owning rentals is not even close. No evictions, no searching for new tenants, no CAPEX, no building inspectors breathing down your neck, no Fair Housing "testers" or lawsuits, no clogged toilet calls at 2 AM, none of the infamous "3 Ts" (toilets, termites and tenants), etc.The trade-off is that you don't own the building and therefore don't have the appreciation in the real estate value. However, if your build your pizza shop and maybe expand to new locations, you're building a business that someone like me can sell when the time comes.Good luck!

Chris Seveney · Answer

@Andrew MichaudDefinitely check the expenses as heat and electric look low for maine - especially if it’s off of oil which also your price may have doubled in past year. As mentioned get estoppels from tenants if payingHave you inspected interior of units as well?

Brandon Vukelich · Answer

Already a lot of good feedback here. Red flags for me that stand out on the financials are water, sewer, trash and maintenance. W/S/T $3800/year? Are the tenants being billed back a portion or on separate meters? I would believe that Maintenance & Repairs would run at least double the $12k/year figure. I see you intend to self-manage. Not sure about your experience but 38 units is not for the novice landlord. I'd find it hard to believe it is currently performing at a 14 cap but maybe you found a unicorn. Best wishes on the decision!

Andrew Michaud · Answer

I currently have 20 units. Reason Water/Sewer is so low is 2 of 3 properties have their own well and septic. This will be a large purchase but don't think it will be too bad. Hopefully not many phone calls!

Percy N. · Answer

@Andrew Michaud, what you have labeled as "Net Income" is actually "Net Operating Income" (NOI).Value of the property = NOI/Cap rateAt a cap rate of 5 (not sure what it is in your market but this is a conservative national avg), the value would be around $3.8mmThe expenses seem on the low side as others have said. Also add in property management, payroll, etc for underwriting purposes.Are these expenses from the seller or broker's pro-forma or actual T12? Don't forget to factor in increased property taxes after the sale, etc.

Bethany Turon · Answer

Lewiston is really street by street, for example, if this was on Blake, Knox, etc, It's quite possibly not a good deal. It depends on building condiiton as well. Feel free to PM to discuss further.

Will Stewart · Answer

This is what I was getting at with my response, just make sure with someone who knows the area, very easy to get blinded by the numbers.