16 Unit Complex - Is this a deal??

Question

I have an opportunity for to buy a 16 unit apt. complex.  14 unit is 2/1 ($395/mth), 2 unit is 3/1 ($575/mth), tenants pays their own utilities.  It's in a low income neighborhood (not war zone), no tenants are section 8 at this time.

13 of the 16 is currently rented out.  So, monthly income if all filled ($6830/mnth income), monthly expenses is about $1,500 (via the seller).  The asking price is $275K (let's assume I buy it at this price - which I won't).  Let's assume I go 20% down and 7% rate (owner will finance at this rate).  He's an out of town owner, so now he just wants out.

I live in the town and can do all the minor repair stuff.

How does this deal sound to you guys?  What am I not looking at that will catch me off guard?

Thanks!

TL

Jon Holdman · Answer

There was a pretty good thread recently that actually had a list along with specific numbers: http://forums.biggerpockets.com/viewtopic.php?t=12320

The exact items are going to vary, depending on your location.  The rule ot thumb still seems to apply.  The expenses can be very sproadic and hard to predict specifically.  Hence why just using an overall number can be more accurate than trying to itemize the individual items.

Some specific items include
Taxes
Insurance
Utilities (common areas, during vacancies)
Vacancies
Property management 
Advertising
Legal costs (leases, evictions)
Groundskeeping
Maintenance
Make ready in between tenants

Mortgage payments aren't included.  Interest is deductable, but not an operating expense.

I found it pretty enlightening to look at listings on loopnet, where they sometimes break down the expenses.  If you find a dozen or so different listings where there are details, and create a listing of the items and their percentages from each, you'll end up with a longer list and a higher percentage than shows up for any of them.   Then, ask yourself, why are some expenses only seen by some properties?  Most likely, most apply to every property.

Jon

N/A N/A · Answer

I've read on here quite a few times about calculating expenses as 50% of the rents.  What are you including in these expenses?  Just general maintenance?

Thanks

Anthony Sulecki · Answer

I dont mean to hijack your post, but I need to run something by someone who has purchased an apartment complex before. Pm me. Sorry.

Jon Holdman · Answer

This looks like a pretty good deal.  As Rehab says, the expenses will be higher than the seller is telling you.  If he's been skimping on maintenance, you may have some big items that need attention.  You want to be thorough in your due diligence.

If you assume expenses and vacancies are 50% of rent, your NOI is $3340/month. 80% loan at 7% years with 20 year amortization would be about $1700/month.  That makes your cash flow $1640/month.  Pretty good.  If you're doing the property management and maintenance yourself, you can earn those parts of the expenses and pocket some additional money for youself.  Though with 16 units, it may be a fair bit of work.

Another post mentions estoppel letters from the existing tenants to ensure there aren't any side deals that make the rents lower than you think.  Something to look into.

Good terms, too, if the owner is willing to finance 80% of the deal.

Sure looks like a good deal to me.  I'd like to find something like this.

Jon

Richard Warren · Answer

First off, the expenses will not be the $1500 the seller is claiming, they will be at least twice that.  The basic rule of thumb is 50% of rent is what the expenses will be.  They could be a little lower depending on the specifics of this building but they won’t be $1500.  Other than that the deal looks like it works out pretty well.  You need to verify that the rent claims are real and look everything over with a fine-tooth comb.

8)

N/A N/A · Answer

WoW 275,000 for a 16plex, I think I'll move to Texas, LOL. rehab702 hit the nail on the head telling you to look over everything with a fine tooth comb and it should be very fine tooth. if you ever get a chance ask the tentants what they like most about living there and what they like least and also what needs fixing the most, they know better than anyone. Good luck. sounds like a good deal for you.