Small apartment high vacancy

[Luis Barberi]

Hi all, I am considering a deal for a 26 unit small apartment unit in a small town in not where I live. The pro forma numbers look very good but they have about 8 units that are not being rented. Currently it does cash flow with what they have by about $400 per month and will go up to $3500 -$4K once units are all rented (at or slightly below market rental rates). I'm sure their sale numbers reflect this but I'm wondering what kind of questions should I as the broker and PM. I look on hotpads, Craigslist etc and I don't even see the apartments being advertised? Reason for sale? Details on why such a high vacancy? Obviously more will come in due diligence. If I pick up this building, should I immediately replace the PM? Of course there may be a reason for it not being advertised but seems strange. Thanks in advance.

[Andrew Johnson]

Luis Barberi Using your numbers:

$80K annual income / 12 months / 18 units rented = $370 per unit per month in gross rents

So a few things:

1.) You need to read up on the "fun" of running $400/month (or less) units. It's, well, just different.

2.) I'll go out on a limb and say *occupancy* has been higher than 70% (18/26) and that the number of the lease is higher than $370 per month.

3.) Based on #2 I'll posit that rent *collections* are miserable, you have to deal with evictions, and at such a low rent-rate this is one of the "properties of last resort" in the area.

4.) If I'm even marginally accurate about #3 (and I could be way off) then "rigorous tenant screening" as a way to increase performance goes flying out the window.

5.) Management challenges aside, you also have different economics when it comes to operating margin. The new stove costs the same whether you're renting the unit for $370 or $670. So does the stove repair. So does painting a wall or patching a hole. But with $370 per unit you just don't have the gross margins to make it "easy".

I'm not saying it's a good or bad deal. I don't know the city, area, neighborhood, etc. For all I know it's awesome. What I am saying is that too many people try to apply the operating margins of a $800/month or $600/month property to a <$400/month property.

My perspective is that if "real estate" is a sport then I'd argue something like managing $800/month units is basketball and $400/month units is football. Sure, both take athleticism but they really are entirely different sports.

There's my Sunday sermon...