48 Unit Apartment Deal - Thoughts?

Question

Just got a bite on an off market 48 Unit Complex. Details:

- Built in 1986

- $780k in renovations since 2017 that include: new blacktop, all new roofs, new windows, new sidewalks, new landscaping, new on-site laundry, new boiler, and half of the units have been completely renovated.

- All Units are 2Bed/1Bath

- Rent ranges from $695 - $705

- Market - $720-$770

- Total Rent Received Last Month - $30k

- Total Potential Market Rent - Approx $36k- Property Manager hinted owner might not take any less than $70k a door ($3.3M)

Thoughts on taking it to the next step?

Greg Scott · Answer

You need to be able to understand if this is a good deal or not.  Based on the information here, it appears it may be, but is not clear.

What is the NOI? Get T12 financials. Are the expenses are reasonable and include property management? What is the Cap Rate at $3.3M? What are typical Cap Rates in that area for that product type. Talk to local brokers / investors to find out. What is the cash-on-cash if you can bump rents? What is the equity gain for bumping rents?

Brent Shryock · Answer

Dont forget to underwrite to new taxes based on new value.  Just my 2 cents.

Greg Kasmer · Answer

Matt - I would get the current T12 and then run your pro forma analysis based on the information provided. If your pro forma looks good (according to your criteria you've set) then to me it would make sense to put together a Letter of Intent (LOI) - but be sure to include a due diligence time period (i.e. 30 days) that begins after you recieve all the necessary documents (rent roll, leases, vendor contracts, etc...) If anything arises from your document due diligence that would severely impact your pro forma that gives you grounds to "re-trade" (negotiate) the value stated in the LOI. Good Luck!

Lioneil Guevarra · Answer

@Matt Prater

Did you also look at the rent roll and the leases?  take a look at vacancy, double check the water utility for  hemorrhages in billing.  Alo look at concessions and non payment. Take a deep look at the T12 also and break down the numbers to see the story of the property.  Make sure the T12 is broken down monthly sometimes they like to send it annualized.   That won't be enough info to see what's going on.

Matt Prater · Answer

Thanks for replying @Drew Cheezum. Only one day in on this thing. Not contacted broker yet. Just getting thoughts on the deal/potential offer amount here on BP. I own 7 SF and 1 Duplex. Strictly interested in MF consisting of 8+ Units. This is the first potential deal I have gotten a hold of in 3 months of focusing all attention on Commercial MF. Just bending ears before moving forward. Slightly intimidating without a mentor/team

Matt Prater · Answer

@Drew Cheezum Yes sir! Appreciate it. I’m sure you know the feeling of strapping up and getting to work on a potential deal. Juices are flowing. Appreciate the advice

Drew Cheezum · Answer

@Matt Prater totally makes sense, you definitely want to have all of your ducks in a row for a deal this large. Commercial tends to move a bit slower than residential so you've certainly got time to work through things and it sounds like you are thinking of everything in the right way!

You'd be surprised how many Realtors do work in commercial multi family deals. Commercial brokers are a great option too but if you have an agent that you've used on your previous deals that you trust it could be worth getting some advice. They may also be able to point you in the direction of an investor or investor-specific real estate agent for some guidance. Utilize your network in addition to BP. Talking to a commercial lender is also a good idea since they would evaluate the property for income potential anyway, they can usually provide some insight on a good or bad deal.

Good luck!

Drew Cheezum · Answer

@Matt Prater can you make your offer contingent on the review of financials? While off-market deals are great because you can usually buy at a discount you forfeit a lot of information you'd get with an actual listing. With something this large it could be dangerous to make a purchase without all of the moving parts visible.

Are you working with a local commercial broker? They should be able to guide you on how to best structure an offer that protects you while still showing the seller you are serious.

Greg Scott · Answer

Seems like it might be a winner.

You didn't say where this was.  NAA surveys apartments across the nation and has good comparisons for expenses by MSA.  Beside the simplistic 50%, if you can compare to NAA averages, that might be a good way to get a better handle on NOI.

Matt Prater · Answer

Thanks for the reply @Greg Scott. As an off market deal they only sent me rent roll for one month and a few monthly expenses (utilities, lawncare, etc.). They won’t give any T12 intel or other expenses unless under contract. In this area, apartments aren’t trading often at all. No agent has a clear idea on commercial MF cap rates. One says 5, other says 8, other guesses 10.

The NOI at asking price (3.3M) would be 175k/yr. At 50% expense rate, that makes 5-6% cap

NOI with rent bump would make 6-7% cap

NOI at $3M offer with rent bump = 8% cap

If $1M raised for purchase, closing, and renovation of non-renovated units, etc., COC after rent bump would be 22% (this seems high)

Super conservative COC with no rent bump still comes to 14%

Again, these are with minimum rent roll & expense info. Really looking for insight on how to proceed with an offer. Thanks again

48 Unit Apartment Deal - Thoughts?

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