Day 1: 24 Unit Apartment Complex Deal Analysis near Austin

[Account Closed]

Hey Everyone, my goal is to analyze at least 1 MFH deal a day for the next 30 days. For Today's Deal, I am analyzing a 24 unit complex I found on Loop Net (Address: 11519 Pecan Creek Pky). Below are the details:

Ask Price:   $2,595,000

25% DP:   $648,750

Monthly P&I (30 Year Amor @ 6%):   -$12,897.15

Annualized Market Pro Forma Numbers

Pro forma Rents (24, 2/1 units at $995/month):   $286,560

GOI with Vac/Cred at 8%:   -$24,357.60

Pro forma Expenses at 30%:   -$85,968.00

NOI:   $176,234.40

P&I:   -$154,765.80

Cash on Cash Return:   $21,468.60

Deal Metrics

Cap Rate:   6.79%

Debt Coverage Ratio:   1.14

Cash on Cash Return:   3.31%

Cost Per Door:   $108,125

Adjust Rent/Price Ratio (per door basis):   0.9202%

My MFH investing education is still on-going, but it looks like the seller is trying to sell this as a stabilized asset. Personally, for a complex built in 1979, the price seems a bit reach. The numbers do not seem to work for me either as, at a minimum, I'd like to be at 12% cash on cash with a DCR above 1.25. Also considering that market rents are near $995, there doesn't seem to be a value-add play here. To make this deal work, I would need to pick it up at $1,975,000, which would be a CAP Rate of 8.92%, providing me with a Cash on Cash ROI of 11.84%. The cash flow would effectively shift from $74.54 per door to $202 per door making this deal more attractive.

What are your thoughts? 

[Nick B.]

@Account Closed, 

If you don't have any information about financial performance of a property, you're wasting your time trying to underwrite it. At minimum you should have current rent roll. That's your starting point for rent analysis. You need to find out if a) there are empty units that can be filled at the current rents and b) current rents can be increased because they are below the market. All that with at least 10% economic vacancy.

On the expense side, you need to go line by line and underwrite every expense category. Never use percentage of rents to figure out expenses expect for the PM fee (8% for small properties, 3.5-5% for large ones). Everything else should be in dollars per unit (repair & maintenance) or per property (contract services such as landscaping). 

Ask a few property management companies what expenses they see for each category on the properties they manage and use averages or pick from a range. NAA survey can also give you a high level starting point.

Utilities can be estimated based on the current numbers but, again, you need to see T12 for that. Otherwise it's a shot in the dark.

For taxes, look up the tax rate in the area where the property is located and use that rate and 80-100% of the purchase price depending on how aggressive or conservative you want to be. Be ready for tax increase next year after you purchase and plan it in the next year expenses.

CapEx should be budgeted at $250-300/unit/year.