12 unit c class in NC ...Deal or no deal?

[Thomas Moran]

Hi BP -

You guys have helped me immensely over the years and I am finally at a point in my investing career where I can embark into apartment buildings. I'll be honest though, the idea of writing an LOI and all the jazz is a little nerve-wracking.

Please poke holes in this, particularly those of you who invest in North Carolina, so my first larger deal doesn't become my last.

The numbers:

-$880k valuation on prop stream. 2.5 miles from the hospital and ECU. (Greenville, NC)

-Seller seems likely that he would sell in the mid 6's (he's an old dude and lives out of state)

-C class property, 12 units, built in the 90's, professionally managed, brick construction

-NOI right now is in the 50k region but based on comparables could easily be improved to 85k ish

-CoC if he agreed to mid 6's is 21%.... total ROI 61% with note paydown etc.

-It would be a 13.1 cap but my mentor owns property in Greenville and says cap rates are 6-7% which would make this worth about 975k if rents were raised.

-PITI would be about 4160 with a 162k downpayment.

-low vacancy, no evictions in the past 10 years

This is an off-market deal (communicating directly with the seller) and am currently finding partners and raising capital. If you know anyone feel free to reach out

What am I missing? Tear this one apart...seriously. Thanks so much in advance.

-Tom

[Erik W.]

@Thomas Moran, looks like it could be a solid deal. That said, "CAP RATE" is typically not used with smaller properties. Sure, you can play with the numbers to see how one deal compares to another, but by and large the deals I have seen where you boost rents and suddenly the value goes shooting upward are in places with 80-100 units or more.

The reason is simple: CAP RATE is a measure of investment used mostly by institutional investors and/or investment groups doing large deals where a personal owner/manager isn't desired. They want cookie cutter investments where you could plug in any professional team and the project would hum along as if nothing had changed. Also, the number of units means that rents and expenses with be high variable. Instead of having many units to smooth out jumps and declines in rents, vacancies, and expenses, it's hard to know what an "average" year looks like.

Too, 12 units isn't enough to justify the time and effort to allocate so small an amount of money.  Think mega-complexes with professional management and maintenance teams.

ROI is also somewhat meaningless if the real number of dollars is small. Leverage makes percentage rates look really good, but at the end of the day how much is going into your pocket for all the effort?

I'd spend most of my time evaluating this on a real cash flow basis.  If you can get 12 doors bringing in $150-$200 a month each after all expenses and debt service, that would be a good deal in today's market.