Deal analysis, what should i offer for this property?

[Will G.]

Hi all, i would like some help on what to offer on a 32 unit complex (my first).

The property is located in a very good area with much sought after school district, built in 1965, 12 two bed 1 bath, 20 two bed 1.5 bath, but current owner did many improvements including, windows and doors, metal roof, plumbing upgrades, repaving, pool reconditioned,flooring, cabinets etc. the only capex i could spot on walkthroughs was the 20 ac units not replaced(recently). There have been only 3 turnovers in the last year, and 9 of the current tenants are section 8. Rents appear to be among the lowest in the vicinity and might be slightly adjustable upward.

256k gross rents

4% claimed vacancy rate=

245,500k gross

Expenses=

$7031 insurance

$27178 re taxes

$21018 repairs and maintenance

$25417 utilities (water incl in rent)

Currently being managed by owner but got quote at 10% of rents and 50% of first month to place tenant

$24500 management

$105144 total expenses

$140356 net

If, big if claimed expenses are correct what should i offer on this property? 

I do plan on 25% down financing, 4.6 percent 10 year note w/30 yr amortization

Thank you for the input

[Greg Scott]

Will:

Have you taken any courses on apartment valuation?   I HIGHLY recommend you do this before purchasing.  You should also get some training on operating them.  The expense of those classes are far cheaper than the cost of messing it up.  These are big assets, so if you get it wrong, it is VERY expensive.

Based on the little info you have given me, a good swag is fairly easy. With NOI at $140K, you have an expense ratio a 42%. This sounds a bit on the low side, so you would want to confirm everything. You also want to confirm how much taxes will change on you after purchase. For that matter, you want to confirm the income side too.

Is there any deferred maintenance.  If you look and the roof is leaking everywhere, you better budget to replace it.  So, if required repairs are, say $200K, you need to be ready to take that off of your offer price.

Assuming the NOI is correct and the condition is OK, what are prevailing cap rates? Given you have Section 8 tenants, I'm assuming it is a C or D class neighborhood. I do not know what the cap rates are there, but a C class neighborhood, you can find at 7 or 8% around the country. To be more conservative, let's use 8%. At that rate, the valuation should be $1.7M.