24 unit complex - high expenses?

[Chase Gochnauer]

Hey guys,

I'm looking for my first large multi-family. I come across one that is in my sweet spot as far as location. Exteriors are in good condition. Interiors are very dated, a couple of units have been completely remodeled.

Asking price: $912,000
Gross rents @ 95% occupancy = $186,447
Addl income(laundry) = $7k

This side looks pretty normal and solid.

The 2013-2015 expenses are where I'm concerned:

$127k, $135k, $133k for each year. Maintenance being $30k-$40k, $10k "administrative", etc. This includes about $14k in management fees. These expenses seem awful high. My business will do a lot of the maintenance, but $30-40k seems quite high to begin with. 

Landlord does pay heat/water, plus common area electric for a total of $25k/yr.

With this, net incomes are $30-$55k/yr which doesn't support the purchase price. I offered $822k giving me some cushion for remodeling and bringing up rents, and essentially that's too low, not even getting a counter, others interested in closer to asking price.

I'm not sure what I'm missing here, unless expenses can be cut 30-40%, it can't support the asking price.

[Joel Owens]

Didn't read all of it. When an asset is brand new expenses can be low such as 30% to 35% all in. Over time as things age the pendulum swings the other direction crossing over 50% of gross expected rents. Especially if landlord pays water or heat etc.

Some managers can run low expenses but they do that by not properly maintaining the asset as their bonus is generally tied to cash flow performance and reducing expenses. So when the seller sells they want a sucker buyer. One who believes what they are selling to be true with very little to no validation of the numbers. Those higher cash flows with low expenses they are showing come at a cost of deferred issues with the property. They will try to pass that off as future capex as well and not an immediate need to repair.

There are a lot of buyers right now paying stupid prices for things. Do not be one of those buyers.