Help with 9 unit under contract Saint Petersburg

[Peter Mason]

Need some help from some people in the know about Saint Petersburg. Feel free to chime in even if your not. I'm under contract for a 9 unit building in St. Pete that I've crunched the numbers on. There is good potential for added value and rents are below market. I'm gonna try to keep this short and sweet numbers wise. Trust me when I tell you I have done the due diligence Cash flow will be approx $7,000/year ROI w/equity will be approx 11% ROI cash on cash before taxes approx 6% For year one we are at the minimum limit for debt to coverage ratio at 1.33, year 2 with increased rents shows 1.6. This is all after a price reduction from $490k to $470k and a 5% more down payment to make bank happy. Point is we are stretched to the limits for the bank. I just had the inspection today. Everything is acceptable except that 8 of the 9 HVACs are 14 yeas old. Typical life span is 15 years. The cost to replace is approx $3,000 to replace each if I'm lucky. My exit strategy is to improve, increase rents and stabilize then sell...roughly 2 years. If I have to replace ACs it kills everything. The only reason I am still contemplating buying this property is because multifamily apartment buildings have been FLYING off the shelf here. Like under contract within a week of listing. I don't know if I should keep pursuing this. The decision is gonna be based on market I think. Any ideas?

[Jeff Copeland]

I don't think a new HVAC, by itself, is justification for a rent increase - tenants don't care how old it is or what it looks like...they only care if it works.

The capital investment would presumably increase the resale value by decreasing potential capex for a future owner...but isn't direct justification for a rent increase.

I think the most important question is how much of a spread is there between current rents and market rent (which is increasingly rapidly)? 

Assuming you'll see a majority of tenants turn over (or see their rent increased) within two years...That is where you will see your value increase; by improving the cap rate. Landlords don't care how old it is or what it looks like - they only care if the numbers work.