Evaluate my Multi-Family Deal, please!

[JJ Mayer]

My 3-person team has 3 SF cash-flowing properties, but we are still really novices.  We are looking at our first multi-family/apt deal, but this a bit new to us.  Does this look appealing?  What questions should we be asking?  Any advice is totally appreciated.

• Purchase Price $429k with 20% down ($85,800)
• 2 All Brick buildings with shared parking lot; built 1970
• In total, there are 9 2br/1ba units
• Fully rented
• Annual income: $65,300
• Annual expenses: $26,900
• Net income: 38,400

Thanks!

JJ

[Justin Duke]

JJ,

It looks like to me based on the deal that I would be interested and look into it further IF..... you were going to manage it yourself and if there was limited rehab needed. The good and bad thing about the information you have given is you are claiming that the property is full (physical occupancy) but what are they really collecting (economic occupancy). The good new is if the property is 100% occupied and they are collecting 100% of gross potential rents then the rents are TOO LOW! When you budget for a property I always run my economics at 8-12% economic occupancy. For example, if you total gross potential rent $100,000 then you will only collect  $88,000 and $92,000. This can be for things such as actual vacancy, bad debt, collection losses. The other problem is in my experience if you are professionally doing the maintenance on the property then it will run you more than $3,000 per unit per year. The NAA average for individually metered properties is $4,800. There is about $1,200 per unit in salary and $300 for office expense (accounting, software) so that gets you to $3,200 best case scenario unless you go replace toilets and fix leaks yourself. Lenders will also make you hold $300 per unit per year in capital replacement reserves.  Also, I always underwrite my deals with at least $2k a door in rehab. Invariably something always slips through the cracks and you would rather use leveraged money to fix it rather than cash out of pocket. If nothing is wrong then put the money into something that will get you more rent. Now depending on the loan terms and how this submarket will support rent increases (market survey) then it looks like if you can raise rents to $700 a month and maintain a 92% economic occupancy then the deal will make an 10.3% cash on cash return. This is only if the submarket will support it and if you have a product that demands this price. If you buy the deal and run it as is you will make a 7.6% cash on cash return. This sounds like a deal I would want to pursue further. If you will send me the actual P&L from the property and a market analysis I can give you a better picture. Happy Hunting!