60-Unit Lease/Option Opportunity: Would YOU take this deal?

[Marc C.]

Sometimes, what you think might be a "deal," just might not be. Or you over-analyze a deal until you talk yourself out of it. Maybe that's where I am on this deal. So I'd like some advice from experienced BP'ers in the apartment market on this deal I've been working for months.

I have prepared an income statement for 2013-2018 using seller's tax records and our projections. See it here: https://www.dropbox.com/s/bf7p2y9xaxlr0ut/60-Unit-...

Rent Roll: 60 units, 43 1BR at $615/mo. ($317,340), 17 2BR at $720/mo. ($146,880) Total Gross Potential Income: $464,220. Current owner's rent roll calls for $462,000.

Market Rents: Rents have not been raised for 3 years. In its existing condition, "market rent" is likely $650 and $775. Section 8 rents for 2017 for the metro are $720 and $847.

Utilities: Master-metered; all rents include all utilities.

Management: Poor to awful. On-site (only). Manager does unit turns. We would replace the on-site manager with off-site management employing a part-time on-site manager for 10% of gross rents. We'd also use 3rd party contractors for unit turns. 

* The owner lives out of state and responded to a direct mail piece.

* The property is grade C- in a C area. We'd like to upgrade it to C+.

* We negotiated a Master Lease w/Option To Purchase for $2.35M, excercisable in 12-36 mos. $50,000 option fee up-front.

* The seller paid $2.2M for the property in 2005. (Note to newbies: Don't count on appreciation...cash flow is king!)

* The plan is to tighten up management, including converting to using a 3rd party manager who employs a part-time on-site manager.

* The plan includes raising rents about 5% a year until they are at market. Implementing RUBS may occur in lieu of a rent increase after energy efficiency is improved.

* The plan also includes spending $250,000 in capex in 2017 and 2018: Change all thermostats to "landlord friendly," replace all toilets with 1.6gpf models (as well as low-flow shower heads and sink aerators), and replace all lights with LED. Plus numerous outdoor improvements to improve curb appeal and landscaping, add a dog run, and improve lighting/security.

* Over time, we'd spend $7500/unit to upgrade interiors as units turned over.

By January 2020, we'd have to come up with 25% of the down payment on $2.35M ($587,500 + closing costs) to close the purchase. WE DO NOT HAVE THAT CAPITAL, and don't ourselves expect to have it by then. The goal is that, by then, the value of the property will be close to $2.85M....we force $500,000 in appreciation, but we have to spend $250,000 in Capex to get that (we have $100,000 to cover the capex in 2017, but we'd need to raise $150,000 for capex for 2018-2019). We hope that, by 2020, with a 3-year track record, we could raise the investor capital needed and also qualify for traditional or Fannie Mae financing. (But what if we don't? What if the economy is in recession by then and 1.) investors don't feel like investing, and 2.) Lenders don't feel like lending.)

Based on the above, would you take this deal? 

Would you INVEST in this deal? (Want to invest now?) 

Would you like to take over this deal, say, in exchange for a $25,000 assignment fee?  

Happy New Year to all, and thanks in advance to all who respond! 

Marc C.