Considering 28 unit apartment complex, big hurdle forward

[Ryan Dodge]

I've spent the past couple years investing in single family homes - over the past couple months I've decided to start selling them off (along with some healthy appreciation) in favor of multi family with better rent returns. I closed on my first duplex a couple days ago.

Anyway, I've come across an apartment complex that interests me. It's been on the market about 4 months and I'd expect to close somewhere around $1.7m. This is a huge jump from anything I've closed on previously (I've done mostly around $300-500k range) and this is the first time I've felt the need to consider taking on investors. I've got people willing to get on board but I'd need to work with an attorney to figure it out. I planned to head in this direction eventually but in much smaller steps.

The place was purchased 2 years ago for $560k and heavily rehabbed both inside and out. It's 100% occupied right now. The area has a lot of demand for rent right now so this isn't very surprising. It's also very close to a large community college.

20 2/1 units ($800/month)

8 1/1 units ($650/month)

Laundry room ($800/month according to them although I would expect them to over report this)

There's also an office building and some spare land that could be better utilized.

Their numbers:

Insurance: $9468 (I actually expected this to be lower)

Utilities: $22140

Property taxes $18600 (I expect this to almost double in the near future)

Cable: $5040

Repairs and Maintenance: $5620 (This seems laughably low to me, I'd expect 4-5x this)

Contract Services: $2400

Management: $12000

Landscape: $2400

Pest Control: $1200

It's got a cap rate of 9%. On paper it looks significantly better than any of the other properties I've owned, but I have no experience with apartment complexes whatsoever. I'm happy with my property managers so far on smaller properties - not sure how difficult the transition would be for this. They've done apartment complexes before though.

I'm really open to any input on this at all. Things to look for, numbers to check, how to structure it with other investors, whether I should just run away completely... any advice is welcome.

[John Casmon]

Originally posted by @Ryan Dodge:

Originally posted by @Account Closed:

Originally posted by @Ryan Dodge:

It's got a cap rate of 9%.  ... any advice is welcome.

How did you calculate this number and why do you think it is important?

I used the NOI from from $22k monthly income vs what I think are conservative estimates for expenses ($28k management, $25k expenses -repairs/cable/exterminator, $39k property tax, and $10k insurance) and divided by the purchase price. As for why I think it's important - this is effectively purchasing a business and using cap rate across each property looked at gives a control for estimating which properties will yield the highest returns. It doesn't mean a ton without properties to compare it to, but I figured that someone will ask so I'd keep it in there.

@Ryan Dodge The cap rate is determined by comp sales of other apartment buildings. Ignore what the seller is asking and use your projected NOI and the market cap to determine your offer price.