28 Unit Apartment Complex

[Tom Scott]

OK guys, I'd like your thoughts on some numbers that I'll list below. The complex is a 28 units total consisting of 14 buildings with two (2) 2/1 units in each. The roofs have all been done around 2003 and most of the AC units have been changed in the past 6 years as well. The neighborhood is what you would expect. It's no a war zone, but it aint the Ritz Carlton either. Buildings themselves are basically bullet proof. They are split face block building so anything short of foundation issues won't be a problem structurally. There have been some issues with drugs on property, but I think if one were to work with the police a little bit you could get that under control. Additionally, it sounds like the current owner isn't enforcing rents very well. It seems like he is allowing folks to get behind and I imagine that that is hurting his quality of tenant as well. Walmart just built a super center about a mile away and the area, I think, is going to grow more in the next few years. Vacancy right now is 3 units I think and rents in the area seem to hover around $450-$550. I think if one were to get strict with rents and get a little better tenant class in then you could raise the rents to $550 over time and add some value. The current owner hasn't raised rents on the long term occupants in many years. I'd like to know what you all think. I think the asking price is too high but I'm not sure how much. 

Tom

Asking price: 840,000

Gross rents @ $485 avg: $162,960

Vacancy @ 15%: $24,445

Effective Gross Income: $138,515

Expenses

Property Management @ 10%: $13,851

Property Taxes (2013): $9,412

Insurance: $9,800

Reserves @ 5%: $6,926

Maintenance (plumbing, electrical, misc.): $11,000

Association fees (Lawn, Trash, HOA, Grounds Insurance): $7,280

Pest Control: $1,344

Write Downs / Bad Debts: $2,820

Total Expenses: $62,433

Net Operating Income: $76,082

Cap Rate: 9.1%

[Jean Bolger]

This sounds not unlike my current property that I'm working on stabilizing, although my vacancy and condition were quite a bit worse (and entry price was considerably lower).

What I can tell you from my experience: 

10% mgmt is probably too low, at least in the short term. The lower the rent, the higher the percentage you 'll need to make it workable/cost-effective for your PM. Your PM will need to evict the problem tenants which will incur eviction costs and new lease-up fees (also rehab $ on the emptied units). You'll eventually make up the difference on higher rents but expect the income to go down before it goes up. I'd put in maybe 13%? 

Insurance seems high? (mine is under 5k) but maybe that's just Florida. Get a quote from a broker who works with American Modern, talk with them about whether you need full replacement or market value coverage (pros/cons either way).

What's w/ HOA on a property like this? (again, that may be a weird florida thing) That said, one of my surprises has been how high trash and landscaping costs have been so it's good to be prepared for that.

Also: what's a typical price per door for C class units in your area? Make sure your final price is in line with what people are actually paying, not what is being asked.