Is this a good deal?

Question

I came across this and it strikes me as pretty good.  Vacancies are low in the area and these rents are low for the area.  What am I missing here that this would not make sense?

Scott Skinger · Answer

Your expenses are below 30% which is too low. Evaluate the property at 50-55% expenses and see if the returns match your investment goals. Right now you have $5000 budgeted for maintenance and you don't have a capex reserve budgeted. Apartment turns, new carpet, new paint, replace an appliance here and there, new roof, windows, driveway, etc. That's going to cost you more than $5000/year. I would have AT LEAST 5% for R&M and 5% for capex reserves.

Gino Barbaro · Answer

@Graham Lutz

The mgmt fee will be higher due to more income, the turns will be more due to more square footage, more floors, etc.

Graham Lutz · Answer

Makes perfect sense.  Do you see any significant difference in expenses per unit, other than turnover, based on number of bedrooms?

Gino Barbaro · Answer

@Graham Lutz

The ideal unit mix is 2 2 beds for every 1 1 bed.  Studio/efficiency units are okay if you have a couple, but the tenants are more transient and will turnover, which leads to higher expenses. It depends what market you are in. A few years ago the one  beds did not perform as well for us. But now, with university, millennial and baby boomers, demand has gone up.  Two beds are the easiest to rent and generate more per unit in income than one beds.

Gino

Graham Lutz · Answer

Thanks Gino!  Could you elaborate on what you mean by unit mix not being good and why you'd like to see it different?  Are you saying you'd rather see a more even mix of studio, 1 bed, and 2 bed units?

Gino Barbaro · Answer

@Graham Lutz

Hi Graham

unit mix is not very good. There are too many deficiencies, which will lead to higher turnover. The expenses are very low. Ask a community banker what expenses would be to run the property.

That number should be around 50% of income in smaller properties. As yo scale and become larger, a per unit cost is more exact. It costs us between 4000-4500 per unit in expenses to run our properties in our market, depending on the asset class

Gino

Graham Lutz · Answer

Yeah, my whole goal here is to get the experienced investors talking, then just sit back and listen!

Jan H. · Answer

Oh well...next. I do think though that it was great that you posted this. It gives us noobs a different perspective; the more experienced chime in, giving clues of potential pitfalls.

Graham Lutz · Answer

I looked up the taxes records and it looks like that number would be more like $3600.  I wasn't planning to self-manage, but it's a moot point as I talked to the broker today and the property went under contract last Thursday.

Jan H. · Answer

Taxes at $1300? Is that an annual figure?

How will this be financed? Cash? I doin not see any financing figures....

Also, will this be self-managed? I would think there would be re-rent fees and such unless there is an on-site manager?

I do think too that Maintenance is estimated too low.

Is this a good deal?

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