Seems like a deal, right? Need a nudge

[Kelly Farley]

I am new to multi-family investing.  Since finding Bigger Pockets earlier this year, I've been focused on learning more about analyzing property.  I started out with looking at single family but after listening to the podcasts and reading more, I decided I needed to enter the game at a higher level in order to get where I want to be.  My W-2 job is engineering and I own a small real estate brokerage that focuses on residential.  Commercial is very new to me.

I was having breakfast with a friend of mine recently and I was telling him about my interest in multi-family and asked if he knew much about them, he didn't.  However, he did have a client recently pass away and his 70 something widow was looking to sell two 9 unit buildings (without a broker) that they have owned since they were built in 1984.  He asked if I want him to ask about them.

Long story short, I have had a meeting with the current owner and her two sons.  She prefers to be completely out of the apartments, but is warm to the idea of owner financing.  I have ran these building several different ways and have settled in on making two offers.

Basics:

Scheduled Rent:  $151,600

Garage Income:  $1,800

Laundry:  $3,600

Effective Gross Income (assuming 10% vacancy):  $141,840

Taxes:  $20,800

Insurance:  $8,000

Electric:  $1,436

Water/Sewer: $6,073

Gas:  $600

Trash:  $2,700

Lawn/Snow Removal:  $3,360

Capex/Maintenance (15%): $21,300 (Probably high since most of capex items are less than 7 years old)

Total Expenses:  $64,300

Net Operating Income:  $77,540

Am I missing any other expenses else besides PI payment?

Asking price is around $1million.  Without broker fee and some negotiations, I hope to settle with one of these two offers:

Offer 1:

$950,000

Owner Financing:  10% down, 5% interest, 30 year amortization and 5 year balloon.

Year PI:  $55,080

Income:  $22,460

Offer 2:

$900,000

Bank Financing:  25% down, 5% interest, 25 year amortization.

Yearly PI:  $47,352

Income:  $30,200

Strong job and rent market.  Occupancy can be reduced to 5% with some cosmetic improvements to freshen up the apartments.  I plan on reinvesting the capex budget of $22.5k/year back into the units for the first 5 years.  Rents can be increased from the $700 average to $750 average based on product in the market.  The older couple that owns them hasn't done much true management to the buildings to keep them running like a business. 

I know I am new to this, but this seems like a good deal right?

A little nervous to make the big leap financially, but the time is right.  I lost a lot of confidence about 12 years ago due to losing two children and still working to get it back.  Any and all input/encouragement would be greatly appreciated.  Thanks. 

[James C.]

Kelly, 

Without digging too deep, your numbers look ok,  with one VERY BIG exception, management.  Put it in at 10%.

That drops your net to 62380. At $1mm it's about a 6 cap. 950k is a 6.7 cap. Both of those leave little room for error. At an 8 cap you're looking at 780k. 

Also, if you are driving for owner financing,  your spread between the owner financing and bank offer is way too low. 

Hope that helps.

Good luck, 

Jim