12 unit apt - What is this Craigs list add trying to tell me?

Question

I'm not educated on the short hand here.  Can someone explain to me what this add is trying to tell me about the returns on this apt building?  Particularly the 2nd paragraph.  I think they are trying to say a 435K investment is returning 30k a year which is a 7% cap rate.  Does that make sense?

"Always cash-flowing (NOI=$46K) 12-unit apartment in one of the best, most-homey parts of Albuquerque Downtown. Close to 12th St & Mountain, easy access to I-40 and I-25. Solid cash-flow income property, always filled. Recently upgraded. Appraised $445K.

Asking $435K, prefer cash or loan purchase -- but short-term owner financing is possible with good down. Solid [ACTUAL] NOI is $30K (includes professional management) for a cap rate of 7%; fully occupied as of March 14; Priced at $36K per unit. Text/Email/Call me if these kinds of numbers appeal to you."

Ben Leybovich · Answer

They state 2 different figures for the NOI - so, something is very fishy to begin with.

Now, if you get passed that, and assume NOI of $30,000, then the next step is - is that real?

Next, what is the top-line number. NOI (Net Operating Income) is what's left of the top-line after expenses (excluding debt service). The rub is that if they are bringing in $600/unit of rent, this would equate to $86,400 of GOI (gross operating income). So, if the NOI is $30,000, you'd be assuming a liability for expenses of $56,000 in order to generate $30,000 - that's before you pay the mortgage. If you assume $300,000 loan, you'd essentially be breaking even...

I don't think their rents are $600 - I think they are closer to $500. And, I don't think this is worth anything more than $25,000/door on a good day.

Finally, if @Sarah Ziehr is right, and they mistakenly told you that the top-line (not the NOI) is $46,000, then 2 things are clear:

1. They are lying about expenses. You can't run 12 units on $16,000 of OpEx. The NOI is never as high as 65% of GOI.

2. $46,000 of annual income means units are renting for $320/month - you will lose your freaking shirt, plus the skin off your back if you pay $36,000/unit for units renting for $320 - period :) You really cannot begin to think about making money on anything under $600 blended rent in most markets.

Good luck, Sean!

Joel Owens · Answer

Sean pay the most attention to this.

"always filled. Recently upgraded."

Always filled - Does that mean a lot of constant turnover at the complex?? I look for what I call the "loyalty" factor. How many units there have been rented with on time payments for years by the same tenants?

You want to see at least 50% and preferably 70% or better. That tends to show stability of the income stream and the complex. Some of these sellers tend to buy these and fill up fast with questionable tenants. Even if after reviewing the lease files the tenants seem solid 3 to 6 months is not enough time to see how the newly stabilized asset will perform over time. You generally want to see 1 year and preferably 2 years or more.

Recently Upgraded - What does this mean? This is one of the most overused phrases that I can't stand. If upgraded means that they have pictures of the a stud up improvement with new electrical, plumbing, windows, mechanical, roof, etc. from start to finish I am listening.

If ( which is 90% of the time ) they are talking about some paint, new carpet, and some handles or a counter top then I have generally ZERO interest in that. It's like an old car that you shine the tires and put new paint on. Looks pretty but the insides are junk and when they go out it is very expensive to replace sucking away all your cash.

Many of these sellers are really just looking for inexperienced buyers who will pay a crazy price for something and then these sellers run away with the cash proceeds from closing never to be seen again.

I do not like "newly stabilized" anything for purchase. I like someone who is an older landlord that has a property they want to sell to retire. They tend to have solid properties that need a little fixing up but have some value to create but the income stream is stable going in.

I do not like properties where someone really failed and now wants to try and sell off a big problem for a premium price.

Sarah Ziehr · Answer

1. They need to sell, they need cash right now (they will settle for a good down payment).

2. There are lots of expenses, what are they spending $1333 per month on?? Thats crazy high.

3. 7% cap rate is fine if the area is A++++

If you move on this I would recommend getting your own independent appraisal.

Chris Washington · Answer

Sean,

In the absence of actuals (i.e. 2015 P&L), I'd recommend evaluating this property using some of the proven rules of thumb for multifamily investing (i.e. 50% of gross income as expenses, 5% or market avg vacancy rate, etc). You have to be careful of actuals as well, as just because the owner ran the property one way does not mean that you will want to run it the same way (i.e. the owner did not spend anything on marketing but you likely will in order to attract best tenents/highest rents). Some of the expenses could (and probably should) change as you apply your operating style to the property, so be sure you account for this in your analysis.

You can also plug the address into rentometer.com to understand how the advertised rents compare to the average rentals in the area.

With these pieces of information, you can get a quick gague on how realiatic or fictional the numbers in the craigslist ad are :)

Best of luck!

Wes Brand · Answer

Starts with finding the address, from there hunting through the various listings until I found pieces of the info I was looking for. They actually had the gross listed with one realtor.

Sarah Ziehr · Answer

They say NOI is $46k, then later say actual NOI is $30k. Thats a difference of $16k per  year, which equates to $1333 per month.

Sean Gover · Answer

@Joel Owens  Thanks Joel, you gave me some great things to think about.  Much appreciation.

Andrey Y. · Answer

Damn it Ben, you're always breaking these kids' hearts ... ;)

Nathan Peatrowsky · Answer

You need to get more information from other sources as you are doing. Base price you can pay on your desired return. If you can get a bank loan, it will be better than owner financing probably, but doesn't hurt to negotiate.

Wes Brand · Answer

30% down, net "before taxes" is actually 29,482 according to a different listing, which isn't the 30k here. I'm not sure what the 46k is supposed to be. Before PM fees? That means they'd be paying 110/unit/month to the PM, and are getting ripped off, a lot.

As for the 7% cap rate, look at what's common for that area for cap rates on apartment buildings, that'll tell you how realistic it is. I'm guessing you'll want a higher cap rate, since, while I don't know NM, 400-475/month is not usually an A+ area (and usually A/A+ areas go for ~7% cap rates, though that depends entirely on your market; 'round here they go for ~3% cap rates ;)

12 unit apt - What is this Craigs list add trying to tell me?

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