To Master Lease Option or not to Master Lease Option

[Kelley Roberts]

I'm looking at a deal where the seller is anxious to sell a 38 unit apartment complex. They bought it for cash in 2005 for $1,675,000. Here are the current numbers.

Asking Price $1,411,000. The normal Cap Rate for the area is 7-8%.

Gross Rental Income (Total Monthly x 12)	$265,632.00
Subtract Vacancy Rate (15%)	$39,844.80
Net Rental Income	$225,787.20
Other Income (Laundry)	$5,021.00
Total Gross Income	$230,808.20
Total Annual Operating Expenses	$178,911.00
Net Operating Income (NOI)	$51,897.20

You probably already see a problem with the asking price based on the NOI. Here is the thing though. The rents are a little on the low side at $465 for 1 br x 9 and $619 for 2 br x 19. The normal rent for a 1 br in the area are $645 for 1 br and $750 for a 2 br. The biggest problem is the expenses. The owner has his book keeper for his storage business do the books. She was friends with the offsite maintenance man at another property management company. She pays this guy about $74,000 per year to do maintenance and turn over repairs. Then there is an onsite maintenance person who get free rent and utilities for another $8388/year. Then they have a property manager who is onsite 3 days a week for a few hours another $24,000/year. Just these three people take down over $114,000/year.

Annual Operating Expenses
Real Estate Taxes	$14,650.00
Insurance	$6,874.00
Water and Sewer	$18,171.00
Snow Removal	$0.00
Trash Removal (ROT $60 x 12)	$3,768.00
Electric	$10,594.00
Gas	$9,803.00
Oil	$0.00
Legal (rule of thumb)	$500.00
Management Fees 10%	$0.00
Repairs and Maintenance	$49,329.00
Other (Turn Costs + Onsite)	$41,222.00
Other (Onsite Manager)	$24,000.00
Total Annual Operating Expense	$178,911.00

I'm thinking this is a pretty easy fix. If I can get a Master Lease Option on the property I'll immediately fire the offsite maintenance man. Then fire the property manager and replace the onsite maintenance guy soon after. Those changes alone and reducing the high vacancy rate to around 5% will increase the NOI to nearly $140,000. This includes paying a management company 10% and another maintenance company around 10%. What are your thoughts?

Total Gross Income
Gross Rental Income (Total Monthly x 12)	$265,632.00
Subtract Vacancy Rate (5%)	$13,281.60
Net Rental Income	$252,350.40
Other Income (Laundry)	$5,021.00
Total Gross Income	$257,371.40
Total Annual Operating Expenses	$117,486.40
Net Operating Income (NOI)	$139,885.00

[JR T.]

Was the revenue for the coin laundry gross revenue for 12 months for a 31 unit building? Do you happen to know how many machines they're operating? Thanks for that, it's a useful data point. I've been considering putting some coin op units into my multifamily buildings, but I haven't seen actual numbers (including yours) that suggest there's any worth to this idea so far. Thanks in advance for the additional info.

My best thought about this is I wouldn't be so quick to fire the maintenance guy who works for his rent. This guy probably knows the place inside and out. I would keep him through the transition and see what he's like to work with. These sorts of folks are often way more valuable than an employee you're paying a crapload more money to have who clocks in and out, takes their breaks, etc. Nothing wrong with that, but the live-in types typically make that place their life. He might have more value than you initially saw, but probably doesn't know how to show that to you except by doing a good job.

The others are definitely gone, rents need to make it to market even if it means turning over some of the tenants (prudently with a strict eye on vacancy control). My main concern is what is your explanation for the high vacancy with below market rents situation? Something isn't right there - either you're not right about the market rents or something else is keeping people away from there - what?