12 Unit Apartment complex, What to Offer????

Question

Can I get a little advise here,

There is currently a deal in my home town that is apartments. There is 3 buildings with 4 units ea. So a total of 12 units. Here is the deal it is listed with a realtor, of course the asking price is way of its league in my town.

The asking price is $320,000... The local county appraisal for all 3 buildings is right at $195,000, this may be a little low, but I wouldn't think much.

The units are currently renting for $350.00 a month 2 bedroom 1 bath (all of them) and water is paid on all units. The owner of the property is in CA, so I haven't contacted him yet.

I kinda wanted to get some ideas from you guys/gals on what a good offer would be. Of course it needs to be low. I know about 2 or 3 years ago they were sold for $120k. I was thinking of offering about $150k.

I will also have to do some research on why they were sold 2 times in the last 4 years.

Any ideas would be great.

I think I can get the rents up on the units to around $450.00 a month

Jon Holdman · Answer

I would agree these units are priced too high at the asking price to make any money.  Its just about break even if you can get a 30 year, 8%, 100% loan at the asking price.

However, I don't think you can say the goal is $100 cash flow/unit regardless of the rent.  If the units only rent for $350, and you want $100 cash flow, you need your payment to be $75 or less:
max payment = (rent * 50%) - desired cash flow
Turn that into a max price and you get $10,221
max price = PV (interest, term, -max payment)
Rent is 3.4% of the purchase price.

If you had a unit that rented for $1500, and wanted $100 cash flow, you could afford a payment of $650 and a price of $88,584.  Rent is 1.7%.

So, I think you expectations for cash flow have to scale with the rent.

On the other hand, I can certainly see that every tenant is a certain amount of work, regardless of the rent.  Maybe that really means some rents are too low to mess with.  The 2% rule applies if the rent is $750 with a cash flow of $100, and a price about $37,500 for the above terms.

Maybe a better way to deal with the tenant factor is to assume expenses are going to be higher than 50% on these low priced units.  If 10% of the $750 rent is going to property management, and property management covers the tenant interactions, then assume $75 is the minimum per unit for property management.  10% of $350 is only $35.  Add on the extra $40 and expenses go from $175 up to $215 or about 60%.

If you consider the cash-on-cash return based on your cash flow vs. the cash you have invested, then you certainly would expect to get a lower absolute return with a lower priced unit.

So, rdoshier8, do the math yourself based on the loan terms you can actually get, your desired return, some expense ratio of at least 50%, and see what it works out to for you.

Jon

Account Closed · Answer

Jon & Mike,

I see where both of you are coming from.

Mike would rather pass on some deals than take them down as he has a specific minimum. One investor I know who does flips has no interest unless he will clear in excess of $50K. He has no issue finding deals so continues to use that as his minimum.

Jon is raising a very good point about how there are sweet spots on the curve. $100 a month per door is not all that interesting when the rent is $3,000 a month per door. Mike's numbers are optimized for Mike in a specific market with a specific tenant mix. If Mike's tenants were Lowes and Home Depot the numbers would be different as would the workload.

Another investor I know expects $200 a month per property and he is dealing with the lower end of the market as Mike is. In this case he is selling on MH homes on land he leases. Hence he is making the $200 a month but the people paying are renting the dirt. Much less maintenance than a typical landlord renting the housing.

rdoshier8,

Focus less on what the person paid 3 years ago. Unless you know the circumstances it is hard to say if they over paid then or just found a great bargain. Frankly it largely does not matter what they paid.

It can make a difference in terms of seller financing if you want to them to carry some paper. If they have equity then they can more easily consider holding paper compared to if they have no equity in the property. The prior sale price does not tell us the present debt structure.

Check the zoning. Can these three be broken up into 4 plex properties or do they need to remain as a 12 unit commercial property. Financing and future value could change.

As Mike says pay for what is on offer now. If the seller is trying to sell you a rosy future then let them guarantee it or have an earn out clause. They will not likely go for that so tell them you only buy what they have to sell today. If the future is better that goes to the owner at the time.

John Corey

Michael Rossi · Answer

Wheatie,

My goal is to have $100 cash flow per unit per month, regardless of the rent.  There are two reasons for doing so:

1.  As you say, every tenant requires a certain amount of work and it is certainly not worth it to me to deal with low income tenants for less than $100/unit/month.

2.  Secondly, and more inportantly, the cash flow is my profit in this business.  It is critical to set a cash flow (profit) target per unit unless you want to have a huge number of units.  For example, my initial goal was to generate $10,000 per month in spendable cash from my rentals.  To accomplish that goal, I needed 50 rentals making $200 each.  $100 of that is the cash flow and $100 is the management; maintenance fees; rehab work, etc that I do.   If I accept less than $100 per unit per month, then I need more units.  For example, if I accept $50 per unit, then owning 50 units will only generate $7,500 per month instead of $10,000!  That is very significant.  If I accept $30 per unit, then I am only generating $6,500; and $5,000 of that is coming from the job of management and maintenance.

Is it worth the effort to run a business with 50 rental units for only $1,500 per month?  Not for me!

So, while I agree that everyone should set their own cash flow goals, for me $100 per unit per month is the goal.

Where do you find units that will generate cash flow of $100/unit/month?  According to the original poster, that's exactly what the current owner did!!!

Mike

Michael Rossi · Answer

The most that you could pay for this property if you want cash flow of $100 per month per unit is about $129,000.

Good Luck,

Mike

Scott Weaner · Answer

Mike, how many places in this country can one find 2 bedroom units for less than $11,000?

Michael Rossi · Answer

Reflex,

It doesn't matter how many places in the country you can find 2 bedroom units for $11,000.  The only thing that matters is what price you can pay to meet your desired cash flow.

The problem with these units (and apparently the market) is that the rents are low compared to the purchase price.

Mike

Michael Shadow · Answer

Don't buy it for it's potential rents buy it for what it is currently renting for.  Depending on the market rent in your area a $100/month increase would probably land you with a few vacancies right off the bat.  Using the 2% rule you want to buy at less than 210k.  If the current owner paid $120 though you should have lots of wiggle room to get it for much less than that.  Go to the assessment office and look up the deed info on it so you get a better picture.

AND while your there and being that it sold twice in the past 4 years I would look deeper into it.  See if you can find the previous owner and ask them whey they sold the property.  Might give you some more insight on the issues with the property than you would get from the current owner.

Rick Doshier · Answer

Thanks for your reply, I think if I can get this deal pretty cheap I think I stand a good chance at making some decent money on this property.

RD

12 Unit Apartment complex, What to Offer????

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