Looking to buy 8 unit apartment - rent roll provided now what?

Question

Many of you have helped with questions regarding my first apartment deal. Here is one more...

• 8 unit apartment complex - owners daughter is getting ready to sell because owner is terminal. I made her aware of my interest I have good insight into the building.
• Apartment is all one bedrooms currently getting 400-500/month. She is already under market value - we feel with minimal cosmetic investments (5K / unit) that we can get rents in the $700 range as tenants turnover.
• I dont have all the costs yet but I did ask for a rent roll. Looks like this thing has been very mismanaged, only in the last couple months did they fill some empty units just before listing.

Now that I have the rent roll now what? I am meeting with several of my commercial lender contacts this week to discuss options. I am not sure if she is willing to owner finance some of it but I will likely present her some scenarios.

Can you review the rent roll below and tell me how I can use this information to make an offer? I cant really calculate cap rate until I get water/sewer/trash/repairs. All I know is unless they have a very low mortgage this building must be losing money based on that rent roll.

2018

1609

January

Feb

March

April

May

June

July

Aug

Sept

Oct

Nov

Dec

#1 Vac

375

0

#2 Frank

400

480

#3 Vacant

0

#4 Chris

385

430

#5 Angie

0

93

475

#6 Kathy

0

348.26

475

#7 Dave

375

425

#8 Nick

450

475

1985

1703

2433.26

2560

2760

2019

1609

January

#1 McKay

116.67

#2 Frank

480

#3 Vacant

0

#4 Chris

430

#5 Angie

475

#6 Kathy

475

#7 Dave

0

(*Out of work Teamster.  Back to work in February and will catch   up.)

#8 Nick

475

2451.67

Enrique Huerta · Answer

A couple options:

(1) Ask them for trailing-12 financials (aka P&L Statement) so you can run some better numbers.

(2) Use the standard underwriting formulas for a quick and dirty offer:

Take current rental income of $2760 x 12 = $33,120

Subtract expenses between 40%-50% of the Rental Income = $16,560

This leaves you with the NOI of $16,560 based on actual, current income using the current vacancy of 12.5%.

Divide that NOI by the cap rate in your area and it should give you a rough valuation of the asset in its current condition.

If you want to find your proforma cap rate before CapX, then take the proforma figures to find the after-rehab value:

100% of Gross Rental Income at full market rents = $67,200 ($700/Mo x 8 Units x 12 months)

Less: 5% Vacancy = -$3,360

Effective Gross Income= $63,840

Less: 50% Expenses = $31,920

Net Operating Income = $31,920

Divided by your cap rate will give you the new value.

What are the cap rates for this product type in the market you're looking in?

Justin Kane · Answer

looks good, jump in, get dirty, make mistakes, ask questions. and jump on that magic school bus already!!

Chase Louderback · Answer

Sounds like you have found a good opportunity, @Adam Craig.  Ask for the T12 (Trailing 12 months of Income and Expenses) and compare that with the current rent roll like @Enrique Huerta recommended.  You will have to look up the market cap rate by looking at comparable sales or speaking with a commercial broker and apply that to the two different NOIs.  That will give you a rough idea of the "fair" market value based on actuals (the T12 NOI being the most accurate).

Unless it the property is in an extreme rough area then you could always apply: actual NOI x 0.1 (10 cap) = offer price.  Hope that helps, but if you have any other questions feel free to reach out and I'll be happy to help if I can!

Justin R. · Answer

Copies of All insurance claims in last 5 years

Accounts for Utility company to verify utility expenses

Copies of last 2 tax bills (at minimum) . Nobody ever tells the IRS they make more than they did!

Adam Craig · Answer

Yes they are having management problems. The owner is in hospice and his daughter has been managing the property for a little over a year which would explain the high vacancy. My wifes sister lives in one of the units and she had 12 people come fill out an applicaiton the day she got the apartment and her apartment is nothing special - so with slight improvements I see more demand and there are comps renting for $600 that have not been updated.

Parker Fairfield · Answer

Adam,

Firstly, I copy/pasted your matrix into Google; you can private message me your Gmail account if you want to take ownership.

All can access it anonymously - and can COMMENT too (also anonymously) here: www.bit.ly/2E6VpYe

Some comments for you Adam.

Adam wrote: I have good insight into the building

Question: Are all of the units identical? Or similar?

Comments: I would highly recommend knowing the 'particulars' of each unit ... and keeping them in front of you. For example, I added a Square Foot column, and a Unit Description.

Assuming that the square feet and unit descriptions are IDENTICAL... and the quality of the units are identical, as are the noise around the building, then the unit rent per month should be the same.

Search out the reasons that you think that units 1, 3, 4, & 5 were vacant for so long. Disrepair? Pocketing rent? Laziness?

Why the difference in rents between #2 and/or #7 versus #8? Did she like unit 8 less? Is there a racial or other prohibited reason (it's illegal to charge more rent in some cases).

Adam wrote: we feel with minimal cosmetic investments (5K / unit)

Question: $5,000 per unit is 'minimal cosmetic' for an apartment that doesn't provide $5k in gross revenue?

Comment: Minimal to me would be something like 10-20% of my annual gross rent.

I would seriously suggest you binge watch something like Restaurant Impossible or Hotel Impossible ... the stuff that their designers do with ONLY some paint and some decorative trim pieces is insanely brilliant. Here are some links that I quickly googled:

www.bit.ly/2N3xk7w

www.bit.ly/2DBnEMZ

Another AWESOME resource is www.houzz.com You can save all sorts of different things you like for free - and then share them www.houzz.com/user/parkerfairfield

Another great site for playing around is Home By Me - an online free site www.bit.ly/2GkwYIY which is great as you can create copies of your apartments. (It's free - and that link is to one of my designs - an off-grid cabin).

I'd use those sites to get some ideas - and then revisit your $5000 per unit budget.

Design Ideas

I would also try to get a local designer - or a design school, and try to get someone to work with you. You give them access to one of your apartment. They design improvements. You pay them a very minimal amount of money and then make sure you advertise them all across your website (or your FB page).

Property Managers

I'd also do a few things with regards to property management companies.

A) call several of the local BEST real estate agencies and ask for the best property management companies

B) call the property management companies and get appointments for them to come by and give you their proposals for 'managing your building'

C) call around your neighborhood and go look at apts to rent in the same neighborhood / same price point immediately; verify that your idea of the 'right' pricing is accurate.

Seller backed financing is fantastic - make sure that the seller can't get the building back easily / at all.  Get the contract written by a commercial property lawyer; I'd say that you should find a law firm that has multiple offices ... and even better in multiple states. And not just some lawyer - but one that specials in commercial real estate law.

Bjorik Mutize · Answer

Pull P&L's and Trailing 12's. Quickly pull comp performance to benchmark. Based on this rent roll, do you think the seller is having management problems?

Definitely would want to see how your debt structure would possible look like to make sure you don't get underwater.

Enrique Huerta · Answer

Final thought, almost doubling the NOI seems like a decent investment. Make sure you conduct full due diligence though and determine for yourself if the reward is worth the risk.

Looking to buy 8 unit apartment - rent roll provided now what?

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