Help analyze this 10 unit apartment complex.

[Toben B.]

Help me decide what this is worth. 10 apartments.

10 - 2 bedroom - 1 bath units rented at average of $500 a month. $485-$525.  

Tenants pay electricity but water is free and water bill averages $500 a month. 

This is a B- / C+ property. It is in a good location, but is a little ugly and needs some paint. 

Parking lot, roof, and everything else look good. 

Rents are close to market - maybe I can push them a bit to $550, but the real savings would come if I choose to submeter the water.  In my city tenants don't appear to recognize the value of free water so I could easily keep the rents or raise a little while billing all the water back.  However this is likely to cause some existing tenants to leave. 

Apartment was built in 1965. 

Can I get a guesstimate based off the information provided?

I will assume a 92% occupancy based off my experience renting duplexes in the area. 

So $500*12 months * 10 units * 92% rents collected give me $55200.

Expenses are:

Water - $6000

Typical Repairs - Estimated $1000 per unit or $10,000.

Taxes - estimated at $3000

Insurance - estimated at $2000

Legal - estimated at $1000

Property management @ 8% = $4416

Lease ups @ $250 a unit = $3000.

One time outdoor painting. $5000.

Net Income = $21,784. 

Is this a decent estimate based off other people with smaller apartments?

I know it would be if I treated it as 5 duplexes. 

Thanks for your help!

[Tom Mole]

@Toben B., your expenses seem a little high against your estimate of income, but it's still in the ballpark, particularly if you were round up. Also, do not include painting as a monthly expense. If you find yourself saying "one time", then it's a capital expense, not a monthly and it goes into a different budget category. Similarly, I would figure out my GSR (gross scheduled rent) without taking out vacancy, instead add 8% (or more) vacancy as an expense and rework my PM costs.

So what is this property worth? I don't know. It depends what you're looking for, where the property is located, what the market will bear, and lots of other stuff. Remember in commercial deals you're not buying a building, you're buying a business that happens to have a building in the deal. You're buying tenants, reputation (good will) and the market as well as the building. 

What the market cap rate? Are you looking for capital gains or cashflow? What do you consider a good return on your investment capital?

I estimate your NOI based on the numbers you gave at just under $26k. Allowing a 7% cap rate would indicate a price of $371,428. At 8% cap the price drops to $325k. DO NOT offer more than that. Get it for less if you can. In any case find out the market cap rate. That is what you compare, not the dollar price, on commercial deals. Once you know the market cap and you know the actual NOI you can calculate the price. The formula is, price = NOI/cap rate. Easy, huh?

This is kind of a round about answer, but maybe it helps. If you want clarification, be sure to ask. Feel free to contact me if you want to drill down on anything here. I'm happy to help.