Value Add 24 Unit Apartment complex, Help!

[Jason Maestas]

Hey everybody, I've been following a multifamily property in a city on the outskirts of Tampa, FL. I First saw it when it was priced at $950k. It has recently dropped  to $660k. It is 24 Units (2 buildings) which are all 2br 1ba apartments. 800sqft in size and all have their own washer dryer hookup. Each unit is separately metered for electric, water, and garbage billed from the city. It is wood frame with concrete slab for foundation. The seller has neglected lots and lots with this property. It needs a new roof on each building and there are lots of broken/plastic windows. The units are equipped with central heat and air with duct work but only about 6 are in use. The rest use window units. The property also has a pool which is locked and not in use at the time.

I have a had a couple contractors do a simple walk through of the grounds and 2 vacant units. They both estimate between $200k-$300k in repairs depending on what the other occupied units look like inside.

The seller has no leases in place (all month to month) and collects cash each month. He cannot provide any financial info as he does not keep records. He is willing to provide seller financing with 35% down. Tenants are currently paying $450/month. After some research and talking with a property manager and other landlords in the area, the units should support $800/month with basic amenities and nothing too fancy. This property seems to be in D class condition in a C+ maybe B- location. Typical Cap rate in the area is 12%.

Since I am starting from scratch I would like any and all help and advice with this deal. Here are the numbers I have so far in its current and future state:

Current situation / Potential stabilization

Asking price: $659,000

Gross rents @ $450 =$129,600   / @800 = $230,400

Vacancy @12.5% (3 units vacant now) =$16,200 / Still @12.5% = $28,800

Effective Gross Income = $113, 400  /   $201,600

Expenses

Property management quoted @ 10% = $11,340  /  @ 10% = $20,160

Property Taxes= $7,000  / (likely increase over time, how much? not sure) $9,000

Insurance quoted @ $14,000 w/ wind coverage or $8,000 w/out wind coverage (I would love to hear your thoughts about this and how you insure) This does include liability coverage with pool included.

Maintenance and Repair @ 10% =$12,960 /  $23,040

Pest control=$1,680  / Same

Reserves @ 7% =$9,072  /  $16,128

Total Expenses = $56,052   /  $67,880

NOI: $113,400- $56,052 = $57,348 / $201,600- $67,880= $133,720

Cap Rate= 8.7%  / (with the addition of the rehab of $300k to the ask price)= 13.9% cap

To buy at a 12% cap I would have to pay $477,900 is what it looks like.

My question is, ( well I have tons of questions but I will start with this) do you feel my projections are reasonable? What am I leaving out or over estimating?

I also am not sure of how much my expenses will actually increase as the rents are raised to market value. I could be way off on my second set of expenses listed above since it is no where near the 50% rule.

I also understand the rents will not go from $450 to $800 over night.  And I understand there will be more economic loss/vacancies. I would like to know how much I can expect in those losses. Also what should I estimate for eviction costs and other costs I am totally missing?

I hear of some people going full charge and kicking everyone out and doing full rehab and re lease ASAP. I also hear some say they plan to turn over 2 units per month to hold on to some monthly cashflow. I would love to hear your thoughts and advice about your value add strategies.

Sorry this is a bit long, I just really want to make sure I am covering all my bases to go into this the right way. I know you will probably have other questions for me and I probably left needed info out, so fire away with all questions, advice, criticism, insults, and jokes :)

Thanks so much, you guys are awesome! 

[Account Closed]

Do not know enough to make a solid recommendation but your expenses are to low. Your probably closer to *85K to 90K. Remember that the property is suffering from deferred maintenance most likely as a result of cutting back on ongoing cost. Additionally, if you are successful in raising you rents, then you tax bill will ultimately be higher based on the new assessment.

As for renovating with tenants in place, most your tenants are going to move out when the rent is raised so I would just put them on notice and those wishing to stay month to month can do so until  you get to their unit for repair.

As for repairs, you will most likely need wind insurance for the lender. I know the Tampa area has not had a direct hurricane in ages but ...

I would fill the pool, Yes it is a nice amenity but for 24 units, the cost of upkeep and insurance is not practical. Focus on amenities that your target market might want and separate you from the competition. Lush landscaping goes a long way to changing your tenant mix. Additionally, you could install a wifi system for the property at far less cost and with really create a value add for your tenants.

Cap rate for purchase is not relevant since you are anticipating a major repositioning. I would focus on your exit strategy. You will need to be stabilized for 6 to 9 months to support your exit price. As for the renovation timing, depending on how much time you have to commit to this, I would spend as much time in planning and getting bids as possible and then pull the trigger and run through the repairs as quickly as possible. If you lease one unit a week, it will take you 24 weeks or 6 months to get back up to full occupancy. New tenants do not want to live with construction going on. Also, you need to time your lease up with the leasing season. Leasing is usually slow in the winter months and picks up in the Spring and Fall.

Lastly, do not forget to include a healthy marketing budget. The property most likely has a reputation (valid or not) and since most your prospective tenants will be from the area, you will need to wow them to get them in the door especially if you are almost doubling rent.