8 unit In Tucson Deal Evaluation

[Anthony Gayden]

I am doing a deal evaluation of an apartment complex here in Tucson, AZ. It is listed on the MLS here. Here are the details.

Asking Price $275,000

8 Units

built in 1987

All are 2 bed/1bath

Rent is $500/month per unit

Owner pays water/sewer/trash

Financials:

They were not provided in the listing, so I am estimating on some costs.

Down payment $68,750

Closings Costs $10,000 (estimate)

Mortgage Estimate $1361/month (estimated 5 year balloon, 20 year amortization, 5% interest, 25% down payment)

Annual Gross Rental Income $48,000 ($500/month * 8 units)

Vacancy Loss $4800 (10% estimate)

Adjusted Gross Income $43,200

Property Taxes $3018 (2013 actual amount)

Insurance $1500 (estimate)

Maintenance $4320 (10% Adjusted Gross Income)

Water/Utilities $5760 (estimate $60/month per unit)

Property Management $4320 (10% Adjusted Gross Income)

Net Operating Income $24,282

Operating Expenses $18,918

Annual Income $12,468

Cash on Cash Return 15.83%

Am I underestimating key costs here? Any advice in my analysis would be helpful. I'm not quite in the financial position to purchase this building yet, but I am trying to keep my eyes open to good deals, and this one looked good to me.

[Mike T.]

@Anthony Gayden To answer your questions on maintenance, I think it is important to get an idea of what needs maintained?  Percentages give you a "ball park" idea and are a good "rule of thumb" but can be grossly underestimated.  For example, when I see 8 plex I immediately think about the 8 units individually.  That means 8 roofs, 8 foundations, 8 interior units that need painting, 8 exteriors that need painting, 8 units that might need carpet/vinyl/tile, 8 hot water heaters or a single boiler, 8 AC or evaporative coolers (if there are coolers, have there been leaks?), 8 sewer lines, 8 toilets, 8 kitchens (8 fridges, 8 stoves, 8 dishwashers, 8 microwaves etc), 16 bedrooms, 24+ doors, 16+ front door locks/deadbolts etc.  As you can see the list of items that might need maintenance can be endless!  As you start to break it down you realize how trivial a percentage can be and this why an inspection becomes your best friend and contingency with your offers.  I hope this helps.  You are well on your way though! Your math is solid, keep analyzing deals, make offers, inspect properties, keep asking questions.  Best of luck!