Help me Analyze this Deal

[Elford Stephens]

Hi Bigger Pockets Family,

We were presented with an opportunity to purchase a 4 unit apartment building. It is currently fully rented.  It is in a small town. The seller gave us the following numbers:

Asking Price: $338,4400

Monthly Income: $3,750

Total Annual Expenses: 11,160

Vacancy: $900

NOI: $33,840

On inspection of the numbers the property looked great. It is in good condition. The 4 tenants appear to be middle class. We are told they pay on time. There is demand for apartments in that small town. So, it may not be difficult to fill vacancies. The tenants pay their own electricity

However, several things are concerning:

First, the vacancy rate they are using is 2%. We have used a vacancy rate of 6-8% for all other properties we have considered. The low vacancy listed concerns me because I am a new landlord. I will be signing up for a 20 year mortgage. If I agree to this vacancy, I will be gambling that I can keep vacancy well below the average for the 20 years it take to pay of my mortgage.

Second the expenses total 23%. We have been analyzing properties for about 9 months. After reviewing the financials we generally see about 40% expenses for properties where the owner pays all the utilities. We see 30% expense ratios for properties where the tenants pay the all the utilities. We have not seen the financials for this property yet. What worried me is that the owner has kept the expenses low by delaying repairs. Though the apartments where in decent shape, they were by no means A class apartments. There were obvious issues that the tenant could complain about (e.g. evidence of leaks, broken cabinets, lack of caulking in bathrooms.) I would anticipate having to pay for all of these repairs in the next 5 years.

Third, the seller advertised the building as a 5 unit (4 apartments, 1 commercial office space.) Rent for the office space is listed at $500 a month. However, they have been unable to rent this unit in the years they have owned it. Furthermore, the local government has refused to let the space be rented as residential. The hypothetical rent was used in the advertised income. The actual monthly income is $3250. This lowers the annual cash-flow by ½.

My cash-on-cash returns would be close to stock market returns. But managing the property will require a lot more effort. I also believe much of the cash in the next 5 years will go towards delayed maintenance. I would love to purchase the property if the price is right.

I am inexperienced with multifamily properties. I would like to know your thoughts on this deal. Would you go for it?