6-plexes that are working on a monthly loss...should I buy?

Question

I'm looking at 2 6-plexes, 2 buildings that are owned by a couple from out of state. The units are not generating a profit now, mainly because of management and neglect to update/upgrade apartments. It's a good location and I will be able to rent each unit for about $450 a month. The buildings are next to each other but need work done to get back to profitable. Asking price for both units is $400,000.00 which is a little less then market value. I can buy a 6 plex without need of repair for $220,000, but I like the location of the 2 six-plex better. Please tell me... what do you think of this potential deal? would you buy a property working at a loss ??? Please advice... I don't know if I should proceed forward. Thank you for your help and comment in this matter.

Jon Holdman · Answer

With 12 units you're likely to come in right about the 50% rule of thumb.  I know there are folks here and in that thread that disagree, but I've seen this rule of thumb in several other places for multi-families.

If you pay the $370,000, you're paying $30,833/unit.  It works out like this:

Rent $450
Expenses $225
NOI $225
Payment $216 (7.5%, 30 year)
Cash flow $9

At least its not losing money, though it will be with all those vacancies.  Expenses on the vacant units are probably something like $200/unit, you're still paying out $216 and you're not getting anything.  At that price, this is a bad deal.

So, what could you pay.  If you assume normal vacancies (not a good assumption, but here goes), then the vacancy is included in the 50%.  Lets also assume you'd like $100/month/unit in cash flow.

NOI $225 (from above)
Profit $100
left for payment $125
max price $17,877/unit
or $214,526 for the property.

But the vacancy rate is outrageous.  So, lets account for that.  Lets assume 10% of that 50% is vacancy, so we'll bump the expense ratio to 84% to cover the excess vacancy.

Rent $450
Expenses $378
NOI $72
Profit $100
left for payment -$28
Uh oh.  You can't buy it cheap enough.

So, I think the $215,000 number above (rounded) is what its worth in good shape, and with reasonable vacancies (5-10%).  Subtract off the fixup expense, and the lost rent for the time it will take to get the units rented up.  With the work, lets call that six months x four units (one vacancy would be reasonable, IMHO, if you have all 12 rented you'll either be underpricing the rent or very lucky.)  That's $10,800, call it $11K.  So, knock $46K off the $215K to get $169,000.  That's what I think its worth.

Forget about the down payment for evaluating the deal.  You're money has other places you can get it to work.  If you throw a huge down payment in, like $200K, and it looks like this is generating nice cash flow ($14,000/year), you're really just getting a return on your cash, and not from the property.  $14K/year on $200K is a 7% return.  Not awful, but not good enough, IMHO, for the hassles and risk for being a landlord.

Ana Hyler · Answer

Thanks for the replies. Here is some more info. The sellers are offering  to sell the appartments with a 7% discount, basically I would pay $370,000.00. The discount is the same as they would pay to sell it through realtor. (basically I'm getting the realtor's commission as a discount). Right now, there are 5 vacancies (remember these are two 6-plexes) so about 44% vacant!!!  My plan would be to hold it long term. The rents would be about $450 per unit (2bedroom 1 bath) after the fixup is complete. There are no sellers terms, basically I find financing through my bank, which I will get it at a rate of 7%. The work that is needed is hard to say... but my estimate is about $30,000.00.

Jon Holdman · Answer

Hard to say if its a deal or not without more numbers.  What are the rents?  How much fixup is needed?  How long to do the fixup?  What's the occupancy?  Are you planning to hold long term, or sell after you fix them up?

I will say you should only look at the current numbers in making your offer.  Base you offer on current occupancy, rents, and expenses.  Read the 50% rule thread.

Richard Warren · Answer

You are looking to buy for a LITTLE less than market value.  This is a situation with a distressed, out-of-state seller, you should be looking to buy for a LOT less than market value.  You don’t mention if the seller is offering terms, that could be a large factor in the deal.  Being able to increase the value of the building is a plus, but there isn’t enough information.  On the surface it doesn’t look like a great deal.  How much work is needed?

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