Potential Deal - Commercial Building - (9) Apartments, Commercial Space

[Garett Scott]

Over the last two weeks I have been fortunate to analyze a few deals.

This particular deal is a 9-unit apartment building with store frontage and a restaurant. (Most of the apartments are Section 8, located above the store/restaurant. Restaurant is changing owners ... to my understanding, all of the restaurant equipment is included. Seller of the property has gotten into personal legal trouble and is leaving the state.)

Purchase Price: $260,000

Down Payment: 20% ($52,000)

Loan Amount: $208,000 (Interest rate of 4.00%, 20-year amortization)

Monthly Debt Service: $1,261 ... $15,132 annual.

(I work at a bank in the commercial lending department ... getting a loan is a non-issue ... I have little to no debt, equity, etc.)

Revenues:

Rents: Est @ $4750 per month, $57000 annual.

(Listing states just shy of $5000/mo .. no breakdown given between units/commercial space ... The property is located near semi-popular restaurants/stores ... however, I am skeptical as to the strength of the commercial space ... current commercial tenants are Mom/Pop ... I feel commercial vacancy may be an issue, especially with low income renters living directly above their store(s).)

Gross Revenue: $57000/annual

Expenses: (Estimations)

Tax: $6110

(Local tax rate - 2.35% of purchase.)

Insurance: $1500

Property Management: $5700

(10%, Referred from co-worker who has Section 8 building. Management does not collect on Section 8 portion of rent ... claims she did not work to earn that portion. Therefore, 10% is conservative. I wish to stay anonymous, LLC will be established with an attorney listed on documentation in-case of property search.)

Repairs/Maintenance: $12,000

(5% of value ... this category worries me the most ... I have no historical data, etc ... however, it is Section 8 and they tear your apartments up ... wanted to budget sufficiently. Am I too conservative? I have never owned a rental property in the past, let alone Section 8.)

Vacancy: $5700

(10% ... mostly the commercial space I am worried, Section 8 will be lower vacancy .. typically)

Water: $2000

Miscellaneous: (Snow Removal, Garbage, Pest, etc.) - $3000

Total Estimated Expense: $36,010 (63% of Rev)

Net Income: $20,990

Return-On-Investment: 8.07%

Debt Coverage Ratio: 1.39

Rule: 1.82 (I would look to get it bought for $235,000 ... to meet 2% rule.)

Cash-On-Cash: 11%

I realize will have closing costs, etc. that I have to factor into purchase price, not to mention, I would assume there will be repairs that will be needed.

What I am most afraid is the repair cost associated with Section 8 Tenants and the vacancy rate of the commercial space below Section 8 ... currently the one business is leaving/being sold as the Seller operated that business and the other is a dog grooming place. Not to mention, I am not sure how the utilities are paid, I am assuming the tenants pay their own utilities ... however, if I am liable for utilities and Local Housing reimburses me for the utilities ... I am assuming the utility cost is already factored into the rent received ... thus I would have to add another expense line for utilities, could be astronomical.

What are your guys thoughts? Am I too conservative on the expenses? (Building is older, 7500 square feet ... Section 8 Tenants ... poor demographic.)

Appreciate the feedback, I have sufficient cash on-hand to invest, I just want to find the perfect first property.