Would you buy poorly managed 8 unit for this ROI after changes?

[Nathan Coldsmith]

Hello all,

Over the past several weeks i have been analyzing an off market FSBO 8 unit apartment building and would love to know your thoughts on this deal.

Current owner purchased in 2002 for $210,000

Was listed in 2007 for $429,900 (listing expired, not sold)

-The owner is currently asking $349,000-

The property consists of:

6 one bedroom apartments

2 two bedroom apartments

Coin operated laundry

Storage shed

Tenants are on a month to month lease and average rent is $665/month (my calculations are based at $675/mo due to coin opp income, storage shed income when rented out, and converting a tenant paying weekly to a $675/mo lease)

All 8 units are heated by electric baseboard heat and separately metered. I believe that the natural gas for the hot water heaters and gas ranges are separately metered also.

Here is the interesting part: The owner chooses to pay all utilities costing him upwards of $17k annually.

There is ROI opportunity by simply keeping the rents the same and mandating that the tenants now pay their electric utility bill (est. $100/mo each unit x 8 units= $800/mo savings in expense $9,600 annually). With that change, we would now be $90/mo positive cash flow per door!!! However, With substantial management changes as noted above, to force appreciation and ROI, we could expect vacancy turnover and potential loss in eviction initially.

From our little bit of experience we found we can hold market rent + electric at our other properties we own.

Based on the small amount of expirence I have, I am inclined to make an offer to the seller as such:

Contingent on:

1)All deferred maintenance completed or a $10,000 sellers credit directly for repairs and maintenance

2)All units move in ready condition per buyer standards

If sold at current (100%) occupancy we offer $285,000

If sold at 50% tenant vancancy we offer $300,000

If sold at 100% tenant vacancy we offer $315,000

OR 100% sellers financing with a purchase price of $330,000

You can see it is counter intuitive to pay more for a non performing asset, however we save eviction costs/ time while being in a strong position to advertise and fill the deal with properly screened tenants locked into our lease, paying at our desired terms.

**ideally we would like to negotiate a seller financing deal, conserving capital. However, if the seller wants paid in full it would reflect a lesser purchase price amount. What potential do you feel for refinancing and pulling some of our capital back out of the deal after 6 months.? What are your thought on this deal?

[Gwyeth Smith]

@Nathan Coldsmith, does the property cash flow as is based on your projected financing or do you need to bill back the electric to achieve positive cash flow? My take on this property is as follows: If you are buying it as a performing asset; i.e. fully occupied, make sure your offer price is reflective of how it's performing (NOI). You want to purchase off of actual numbers.

If you're purchasing this as a non-performing asset (i.e. high vacancy), then you want to really project out what it looks like as a performing asset, how long it will take you to get it there, and at what cost. You want to figure out your buying criteria on both fronts. Examples could be buying at 8% CoC and achieving $2K/mo cash flow year two (just an example....you should figure out your goals here).

Since all tenants are on month-month leases it might make sense to purchase as performing, off actual numbers.  You can then put the existing tenants through your screening process.  Those that fit you can renew on your lease and those that don't you can give notice on non-renewal.  Doing it this way also opens up more financing options to you.  You can go the community bank route and if you are able to negotiate any seller financing, that could go towards the down payment.  Just make sure the lender is good with your structure.  You could also see how the property is currently financed and go to that lender to see if they can work with you since the asset is already on their books.

Good luck.  Let us know how it plays out!