6 Unit - 5 apts with 1 storefront

[Travis D.]

Good Afternoon!  

I have experience with 2-4 unit residential but working on transitioning to focus my investing in bigger unit buildings and I have a few questions on a property that came across recently.  It's only a 6 unit, with 4 1br units, 1 2br and the storefront.  

Gross rent is 48,600 (all units are well under mkt as previous owner hadn't raised in 15yrs.  Market Rent estimate is 60,000)

Expenses:  26,293

NI: 22,307

Asking price is 360,000.  

1.  Expenses include electric and gas as prev landlord paid for all utils.  There are 7 sep electrical meters but only 3 gas meters so I'm assuming it wouldn't be an issue to have all start paying for their own electric.  With only 3 gas meters I'm assuming that would be a challenge.  Any ideas here? 

2.  I estimated 4,000 for prop mgmt expense even though i would self manage and used 1,500/mo as maintenence and repair expense.  Is that a fair estimate? 

3.  There is also a 1/2 lot that is attached that is used for parking but tenants currently not charged for that. 

4.  Property is owned in estate of landlord who passed so children selling it and have deadline of next April before they finalize the estate so there is some motivation there.  

5. Property is owned free and clear.  

I'm not an estate attorney or tax accountant obviously but is it a tax benefit that the heirs sell the property before the estate is settled?  If so, would owner financing be a benefit or something worth offering?  

Thanks for all the input as this is a new realm for me! 

Travis

[Giovanni Isaksen]

Typically heirs who put a property on the market just want to be cashed out. If there are even just a handful of them getting decisions made without causing squabbles is a real threat and it's one most want to avoid. Especially if they're spread around the country (or the world) the logistics alone can be enough to make them want to sell.

If the NI you listed is the actual Net Operating Income (NOI), their ask is a 6.2% cap which may or may not be a little rich in your market. If you are confident you can get market rents, some utility costs moved to the tenants and some Other Income in the form of paid parking there's some nice upside though. Also the extra land may have some additional value, especially if it can be built on (or expanded onto by the existing building).

Once you're sure you've got a handle on what your expenses should be the other thing to look very closely at are the deferred maintenance and any building systems that are reaching the end of their life (roof, boiler, paving, etc). I would hire an engineer to assess what these are with cost estimates/bids. This will cost more than an inspection from a home inspector but there's a lot riding on it and will be money well spent.

If you are confident of the upside, why not offer the heirs their full asking price subject to them making all the repairs and replacements identified by your engineer, with the fallback that you're willing to have the work done yourself if they will reduce the price by the cost of the work?

If you can get the market rents, some other income and keep the expenses to 28k your effective cap rate is in the 9% range which is pretty nice. 

One other thing to have checked out by a pro is the commercial lease, they're a whole different ball of wax and each is typically one of a kind in its terms. It's important to know how long the tenant will be there on lease and what can/will happen at expiration.

Good hunting-