Advice on potential purchase

[David Troup]

Hi everyone,

I'm a newbie here, I just discovered these forums for the first time, and what a great resource it is. Thank you to all who participate here and offer the benefit of your experience to others.

I am not a new investor, I have owned a number of small to medium-sized multifamily properties over the years. I currently own two properties in Texas, a 20-unit and a 23-unit, both of which have been generally profitable (I've had them for about 10 years each.)

I recently became aware of a buying opportunity in the same city. It seems pretty good to me, but I'm looking for some other points of view before I get in too deep.

The property I'm looking at is bank owned. It looks as if perhaps the former owner was overleveraged on other properties and simply pulled out all the money and didn't pay his bills. The property does not seem to have any of the problems (trashed units, missing appliances, etc.) that you often see with REO properties. It's more or less completely full and, although it's not going to win any beauty pageants, seems to be a solid C/C+ property in a good location. No major deferred maintenance is obvious except perhaps a good paint job.

The property is 32 units (11-2/1, 20-1/1, 1-Efficiency) with monthly gross income of about $19,000. They are estimating expenses + reserves at about $12,000 per month; I think this may be low, at least for a while, and I'm using $13,500 for expenses for now. That means net income of about $5,500 per month before debt service.

The bank (a smaller local bank) is willing to finance 95% at 5% to a competent operator (that's where I'd come in.) So I think very conservatively I should be able to cash flow about $2,000 per month after all expenses, reserves, and debt service, which is a pretty nice cash-on-cash return considering the low downpayment. I don't normally believe in leveraging myself that much -- I'm conservative and would rather put down more money -- but in this case, I think it makes sense if the bank is really willing to finance most of the price.

Oh, the price -- $675,000. I'm thinking I'd like to get them down a little lower – around $625K would bring the cap rate up to 10.5, which seems appropriate for this sort of property – but it doesn't seem bad regardless, especially with the attractive financing.

So my question - am I missing anything that's going to make me sorry if I jump into this? There will undoubtedly be some surprise maintenance issues; it's a 1960 building and it's always something with these old buildings. But I think I've been conservative enough in my planning to account for much of that.

I already have a property management company that I am happy with in this city (they have taken over managing the property for the bank) and they seem to think it's going to be a great property.

I haven't done a new acquisition in quite a while so I feel a little rusty in my evaluating here. Any comments, criticism, or thoughts would be welcome. Thanks!

EDIT: Other useful info: average unit size around 725 sq. ft. There is a pool. Roofs about 5 years old. Some of the bathrooms a bit ugly, but I don't mind rehabbing units as they become vacant.