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