14 unit assessment - management questions

[Adrian Stamer]

Hi

so I am looking at a 14 unit apartment building. It is in a cheaper more rural area, but has excellent rental history. I am mostly curious what you think about the management and maintenance setup, but to get us on similar pages I need to share the numbers first.

I'm working off a $415k purchase price, with an extra $15k held for initial improvements.

Gross rents are $6100 a month, ($73,200 - 10% vacancy = $65,880 a year)

They currently have expenses for 2012 (and half of 2013, so they estimated for the remaining part of the year) which comes out to $29,074, for a NOI of $36,806.

But, with these numbers they have only $1k set aside for major repairs, so with a 4.5% 20 year loan, this current does not work. This would provide 9.77% cash roi, but raising the repairs budget to $3k a year drops the cash roi to 8%. Though I believe this is still above 8% cap rate (34,806/415,000)

but before you say $3k a yr is too low, let me ramble on some more below...

now a bit of a break down on the expenses

Landlord pays electricity for common areas, water, sewer, trash which runs $790 a month, with water taking up the majority of that. Tenants just pay electricity. Does this seem normal for a 14 unit? Obviously it varies depending on localities, but ~$475 a month for water strikes me as high.

Also, I am curious what you think about the full management and maintenance setup. Right now they have management in place which is 10% with no fixed fees, just based on gross rents. Also, they have a maintenance guy on site who in exchange for his services gets a free 2bd apt (which would rent $450 a month in rent). So PM is ~$6588 a year and maintenance guy gets another $5400. The current owners say supplies for this maintenance also cost another $4k.

Going off the usual 10% rule of thumb for maintenance and repairs, $5400 for the guy + $4k in supplies + another $1k (according to them) seems rather high for this building. Especially since $1k a year reserved isn't nearly enough for significant repairs. Also there seems a little bit of redundancy between the property management and having a maintenance guy on location at all times.

Maybe due to the more rural location and cheaper rents is the reason for these above average costs? I'm just trying to figure a way to streamline expenses some.

Thoughts?