need your expertise analyzing this 12plex

[Spencer R.]

Hey everyone,

I have a potential deal I need some help with. I can buy an older 12 plex in a nice residential area (mostly sfh's on the street) for 560k. Gross rents are 75K/yr for 2013, with net after expenses (not including financing) of 51K. All units are 1 bdrm/1 bath.

The good:

-I have a couple of other rentals in the area and know the market...no problem filling with good quality renters here. college area. low vacancy.

-It is a solidly constructed building that has been kept up well in and out.

-Newer replacement windows, high ceilings, charming apartments/exterior, good parking.

-Separate electric meters.

-rents are on the low side, especially since heat is included (see below)

-have not seen a deal like this in the area lately

The not so good:

-Building was built in the 20's.

-Older wiring but newer breakers. limited to 2 circuits per apt. ranges are all gas.

-landlord pays for all heat with a gas hot water bolier/baseboard system. There is one large central (~25 yo) boiler, tenants do have individual thermostats however.

-gas bill for heat/hot water is 6.5k/yr

-water/sewer is 7.5k/yr!, 6x what I would expect for the area

-owner wants to close quickly and requires almost all of my ready-cash down, 400K, the rest owner financed--rate tbd. he does not want to wait for bank financing.

My other units are older too and I have good local repair guys, but I am mostly worried about paying for heat/dealing with a boiler, the horrendous water/sewer bill and limited wiring. Anyone have experience or suggestions in dealing with these issues. I would get the boiler checked out since I worry it is using a lot of water. Do you think the numbers make sense given these challenges? Taxes and regulations are low in this area.

Thanks!

[Joel Owens]

24k/75k = 32% claimed expenses

8% added they are claiming 40% total expenses on an all paid utility landlord building that is almost 100 years old.

I call that plain and simply a load of crap. Normal expenses in such a scenario before debt service and I have ran numbers on a ton of buildings for clients is 60 to 65% of gross expected annual rents.

If they show tax returns of 40% total it's almost guaranteed when you walk around to find immediate deferred CAPEX that needs to be taken off the sales price.

"owner wants to close quickly and requires almost all of my ready-cash down, 400K, the rest owner financed--rate tbd. he does not want to wait for bank financing."

H%ll no!

If this was an unbelievable deal way above market cap rates then to lock it down maybe consider it and then refi out later. This isn't that good of a deal at all. Frankly save your money and go after another asset you can leverage. Unless this thing is sitting on a ton of land or could be demolished for a higher density and you could make much more that way as an exit then I wouldn't be interested.

These are 1 units which have more turnover. The building is very old hiding a bunch of secrets most likely. The seller wants to only show you one year returns and expenses. They want almost 80% down and finance very little and you do not know what the rate will be.

WHY are you even considering this? Just hand out 400k to the charities. At least then you will feel good about it.