Is 24 units a decent size apartment complex?

Question

I am going to make an offer on a 24 unit apartment complex. I had heard that 40 units was the smallest to consider. That being said I now have 17 units spread across duplexes, houses, and a quadplex.  I will need to use a manager on this one as it is about 45 minutes away and I have a full time job.

How can I find someone to help me price the apartment complex. My experience with appraisers has led me to trust my own numbers over theirs. However I have never bought more than 4 units so I need a little help on this.

Thanks in advance!

Paul Choi · Answer

congrats!

Get current rent rolls. figure out gross rents. put in a 40% expense ratio and then your NOI.  based on PP, your DSCR should be over 1.25.  higher the better.  This is the short hand way of how lenders underwrite MF so you should too.

Figure out the average cap rate for the area and compare if you are over paying or found a good deal.  then plug in stabilized pro forma rents, figure out NOI, plug in a conservative cap rate and you can figure out your exit price.  Even if you don't plan on selling, have an exit strategy on hand - sell, refi or 1031x.  that way you can figure out what the  upside is in addition to cash flow.

good luck!

Anthony Wick · Answer

@Toben B.

I'm in the market right now for about a 16 plex. I also work a full time job, and have purchased three smaller properties in 2018. Lots of good info here from people. Pro Forma's are "fun" and all, but of little use to me. I'm asking for Profit and Loss statements, actual utility bills for 24 months, verifying property taxes on county assessors website, want the exact rent rolls and leases, and will call my insurance agent for the rate I'll be paying. Also, I'd like to see what the actual maintenance that was done. I do estimate the vacancy, capex, property management, and maintenance reserves based upon the actual property I'm looking to buy. Invariably, the pro forma's I see seem to miss at least one expense; such as maintenance, property management, or vacancy. I'm not sure how you come up with an offer price without a lot of these. I would NEVER flat out believe what a broker tells me. I appreciate that all the units are rented, but that doesn't make future vacancy rates 0%, sir. And my pet peeve is when they say what rents "could" be, or that "rents are way below market rate". Ok, well, I'm still making an offer based upon the income I'll be stepping into. If rents "could" be so much higher, how come they aren't?

Chris Grenzig · Answer

@Toben B. $620 *24 *12 = $178, 560 if you take the $158,00 gross income that vacancy of just over 11%, not terrible, but need to talk with lender to make sure this isn't going to be an issue.

Expenses are definitely low if you're going to have management, but ultimately it doesn't matter, not really.

Ask your manager to put together a proforma and see what your income and expenses are and how much upfront capital you're going to need to hit those. Also, ask to see what they think would happen to income/expenses if you put in more capital or less capital.

Plug in those numbers and see what your returns are, if they work than buy it, if not offer what makes sense. If there's a big discrepancy on it, talk it through with the broker and explain what you're seeing and why it doesn't make sense. Perhaps theres something you're not accounting for and he knows about and then discuss it with your manager.

Maybe he knows its overpriced and he's testing your feasibility a bit, if you can explain why you're not interested at that price, he may know not to bring you overpriced deals anymore.

Also, make sure you know how taxes are being reassessed for commercial properties, might be different than duplexes.

Quick maths $158k / 2 = $79,000, I'm going to overshoot and go for a 7% cap rate assuming it's in Tulsa area (I know 45 mins away) where you are from and I get a value of $1,128,571.43. This is roughly $47k a door which is good, we always like to see price per door less than or equal to avg rent x 100.

TLDR: Find a good manager and ask for their help

Tyler Kastelberg · Answer

@Toben B.

Toben: 24 units is a great size! It's still too small to form an on-site management team, so your biggest asset (and risk) will be a strong property management team.

The underwriting will be important. You'll want to make sure your growth assumptions, rent roll assumptions, and expense assumptions are independent of the broker's opinion. Costar has good data, but you'll want to supplement with local research (apartments.com, craigslist, zillow, etc).

David Walkotten · Answer

If it's managed then size should not matter. Only in the case of an on-site manager that could not be shared for some reason, you might pay too much for management. But I imagine any decent size metro will have a management company who could do it around 10-12% all-in management cost.

I went from 17 one-to-four unit properties, to a 24 unit in June, to a 40 unit closing next week. They all have their challenges but just find a good manager who can handle it and I don't see any reason that 24 is too small.

Toben B. · Answer

Property is B but surrounding population is growing nearly 3% a year in this suburb. There is no affordable housing nearby.

Toben B. · Answer

Here are the number I was given. They look low, but I am used to duplexes.  Apparently water is included in rent. I am rounding to make it simpler

Gross income $158,000

Expenses------------------

Insurance        $11,500

Office                $400

Collections       $550

Cable               $2870

Property Tax   $7800

Repairs/maint $12,800

The expenses look a little low, but the owner is managing himself.

Todd Dexheimer · Answer

24 units is a hard one. It's big, yet small. Too small for on-site management, yet big enough where you want on-site management. It's that stuck in the middle property. If it is B+ to A, then I would say to go for it. If it's a C property, then I would say don't.

3rd party managers want to make money. If they are dealing with a difficult 24 unit that only rents for $800/month/unit, that is a lot of work for the headache. If it is an A class apartment that is going to be a lesser work load and rent for $1200/month/unit, then it becomes more lucrative for them to manage.

(the rent numbers are just examples)

Bjorn Ahlblad · Answer

@Toben B.To get the actual P&L you simply ask for it. I would ask for 3-5 years. If they say no that is a giant red flag and I would simply leave at that point. Assuming you get a P&L share it with your accountant. Run the numbers on BP. Definately get a proper inspection. A 24 should definately be more profitable than your duplexes.