Please Help Analyze This 12 Unit Apartment Purchase

[Brad T.]

Hello Everyone,

  I have just placed an offer on a 12 unit (3 fourplexes).  Can you please give me your thoughts on the deal.  The numbers seem to be good to me.  Any advice would be appreciated.

Offer price $800K

Owner financed, with $100K down, 30 year amortization, 5% interest, 10 year term

Fully Rented at $800/mo each $9,600 gross monthly rent

$8,300 monthly cost including vacancy, maint, taxes, insurance, property management

I am calculating a 8.7 cap and $69,850 NOI

Thanks for your input!

Brad

[Brandon Hall]

@brad t. You are estimating operating expenses at just less than 40%. That's pretty aggressive. When was the property built?

It looks like you haven't consider capital expenditures. You have three buildings, which means three roofs, three structures, three driveways/parking lots, etc etc. You need to appropriately account for capex, or it will sink you.

Assuming you accrue $200 per unit per month for cap ex, you've now gone from a $69k NOI to $43k cash available for debt service. Your debt service will be roughly $45k per year leaving you with realized cash flow of -$2k per year. You may think you are cash flowing $28-29k per year, but this is only true if you aren't accruing for capex. Hold the property long enough and capex will come around.

Let's look at it from another angle. You are paying $266k per building and that building only generates $3,200 in gross monthly income. In the markets I target, I can pick up a building generating the same for about $190k. I don't say this to say that your deal is bad, rather to show you that there are better "cash flow" deals out there; it just takes patience and diligence to find them.

All that being said, you haven't given us many details regarding the property. What's your exit strategy? Is there appreciation potential? How are you going to add value?

For anyone to provide a proper deal review, we would need itemizes numbers, not a summation of the expenses. I'd want to see your estimates vs actuals for every expense line item there is to get a good feel for where value can be added.

This could be a good deal, but we are lacking information. Additionally, you need to account for capex or you will sink when it's times to make those expenditures.