14 unit assessment - management questions

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14 unit assessment - management questions

Adrian StamerPro Member
Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes

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?

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    This is the quick and first glance way I look at it.

    Verify gross rents didn't have first months rent half off or free otherwise stated annual rents per unit actual rent is lower and that rents have not shifted downward since all the lease ups.

    If lease rates have moved down some of the tenants will want a reduction or leave to go elsewhere. If tenants have lived there a long time low turnover is great but when they do leave the units will need a lot of work to get re-rented again. Existing tenants get used to lived in unit conditions where a new tenant with a fresh set of eyes will look at the place differently.

    6,100 X 12 = 73,200 gross annual

    Landlord pays some utility I go 60% annual costs.

    73,200 X .40 ( 60% costs) = 29,280 NOI

    29,280/ 415k purchase price = 7 cap

    I do not like small properties like this because of scaling issues. I also do not like landlord paid utility of any kind. Guess what happens when utility rates start rising each year along with special assessments at a pace that exceeds how much you can raise annual rent by?? The excessive utility starts eating more and more into your returns. This is why I avoid landlord paid utility multifamily like the plague unless I am getting an awesome price with exceptional returns. A 7 cap wouldn't come close on an older building to doing it for me. Especially if you are putting 20% down you are dropping 90k or more with due diligence fees and down payment on a marginal deal.

    What I would really look at with such a property is If the seller is willing to hold a second to improve my cash on cash return?? If a seller holds a 10% second you might save 40,000 on the down payment. The biggest item is the utilities. Can you offload utility completely on the tenants and how much would it cost?? I am not talking about a bill back or rolling into rental amount. I am talking about getting separate meters for everything and if the tenant doesn't pay the utility company billing directly comes out and shuts off their unit.

    Even if it can be done if every other landlord includes utility and tenants are conditioned to that for the area then it's a waste of money to change it because they will move and rent from the landlord down the street. The problem with landlord utility is these items are increasing at a fast pace on what they charge for usage. When tenants are not directly billed for utility then they are slow to report leaks and repairs needed which causes you more damage to the units and they also consume more as they are not paying for it. The mindset is comfort at any costs versus " I am paying for this and use it at a rate of what I can afford to pay the bill ".

    I help clients all the time on larger buildings. Utility is the number one cash flow killer out there and the unknown you can't control as to how fast it will rise each year.

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  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
    12y

    For our multi-family properties I actually prefer to pay certain utilities that could become a lien on the property if the tenant were to default. Also in our jurisdiction, garbage/recycle must be in the name of the property owner for multi-family properties. I just take into account the cost of garbage/recycle in the amount I charge for rent.

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  • Adrian StamerPro Member
    OP
    Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
    12y

    Thanks for the responses. For me this is a larger deal, especially with the unit count. One thing I forgot to mention is the laundry on site does between $1500-2000 extra a year.

    While I agree the utilities is less then ideal, at least the electricity is separate so certainly better then nothing.

    I am still curious to see what is thought about the management and maintenance situation. Is this reasonable/normal for something of this size?

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  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    12y

    All in cost of 700 per door on Maint is reasonable. One problem is he gets a raise every time you raise rents. How many hours is the manager working. At $10/hr she could put in 12hr/wk for that amount with no benefits. We have an offsite manager on a 20 unit and we pay 8% go gross. That would be 5430 including laundry. 10% is more typical and that puts her in the ballpark.

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  • Adrian StamerPro Member
    OP
    Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
    12y
    Originally posted by @Jeff Greenberg:
    All in cost of 700 per door on Maint is reasonable. One problem is he gets a raise every time you raise rents. How many hours is the manager working. At $10/hr she could put in 12hr/wk for that amount with no benefits. We have an offsite manager on a 20 unit and we pay 8% go gross. That would be 5430 including laundry. 10% is more typical and that puts her in the ballpark.

    I have no idea how much the manager is working. This 14 unit has both the maintenance guy AND a manager. I talked the manager on the phone earlier, the maintenance guy works roughly 62hrs a month at $8 hr. The manager is the standard 10% and takes care of everything while also keeping the maintenance guy on task. They are using him to slowly redo all the units.

    As I have mentioned, this area is rather rural, so I do believe the maintenance guy is worth the money. But there is really only one employer in the area and the tenants primarily come from there. I'm just not so sure about the actual property manager. I personally am 2hrs away from the place, but my other business partner who is more hands on with some of our other properties is only 20 minutes away. He also has a maintenance guy on hand to take care of various tasks and other employees for his business.

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