Help Me Analyze this Apartment

[Drew Steinman]

I know the owner of a 12 unit apartment and have approached him about selling it to me. Would love it if anyone would help me with what they think it's worth. Here are the details:

Where: Toledo, OH (near University of Toledo)
Rent Class: I would classify it as a C- to D+ area
Size: 8832 Sq Ft

Year Built: 1968

Rents at 100% Occupancy: $58,500 (7 1BRs at $375/month and 5 2 BRs at $450/month).

2017 Rents: $57,416

2017 Gas Exp: $6034 (Boiler heating, paid my landlord)

2017 Electric: $1486 (For hallways/common area)

2017 Water: $4374 (Not sub-metered, paid by landlord)

2017 Trash: $1600

2017 Real Estate Taxes: $5900

2018 Insurance : $2600

Other Info:

- The University now requires 2nd year students to live on campus (previous just Freshmen did) so this has pushed down student rents for the area.

-It is a low rent area. I think rents may be $50-$100/month under market after factoring in the landlord paying water and gas. It is difficult to compare newer/better apartments in the area vs this one so I could be wrong on this.

-Boiler heating is original to the property so this is a potentially large expense.

-Large cap-ex for updating electrical which reduced insurance to $2600 for 2018.

-2 units are renovated pretty nicely but I'm guessing the rest are in rough shape.

-I do have a property manager with experience who I believe can manage the property better however I don't know if the market will allow higher rents with improvements. I currently have 4 single family rentals so this would be my first apartment.

-I have a good relationship with the property owner and could potentially get seller financing on the down payment and do commercial financing for the rest.

Questions I have:

-What should I use as a conservative expense ratio for an older/lower rent apartments like this? What should the NOI be on this?

-How would you estimate potential for rent increases? My property manager has given me an estimate. I've looked at rents in the area but other apartments are in better condition and better locations and I'm unsure how much to adjust for these differences.

-What would you estimate for a purchase price?

Let me know any questions you have and I'll try to answer as best as I can. Thanks in advance!

[Ryan Pyle]

Drew, I've owned lots of apartments in the area you are referring (2289 Upton, 2445 W. Bancroft, 2155 Perth to name a few....sold them a couple years ago), so I'm very familiar with the area.

My experience is with paid heat, and self-managing, you can expect a 60% expense ratio. But the good news with this building is if the electric has been upgraded you can switch to electric baseboard heat. That is a huge plus. Those old boilers and boiler systems are a pain in the a$$...lots of service calls because of air in the system, pumps going bad, etc. And if the boiler goes down it's a major deal...no heat to the entire building. If one baseboard goes down it's no big deal...no heat to one room.

The rents seem low. I was getting $475 for one bedrooms and $575 for two bedrooms at the above mentioned buildings.

Everything else seems in line. Beware the taxes as the tax value of the building will change when you buy it. So if you pay more than the current tax value, your taxes will go up accordingly.

Without looking at the building, my initial back of the envelope would be $195,000. That's $58,500 x .4 / 12% cap rate. But that is subject to a much deeper analysis and walk through of the building.