Thoughts on this deal? 9-unit rental, with commercial space.

[Garett Scott]

I had posted this deal a couple of months ago.  The property is still listed (red flag) and I am revisiting this opportunity.

Asking Price: $260,000

Apartments: 9 Units (Fully rented, average rent is approximately $370/mo per unit ... total $3330)

Restaurant Space: 1566 Sq Ft (Currently rented for $1000/mo)

Retail Space: 756 Sq Ft (Currently rented for $500/mo)

Total Gross Revenue: $4830/mo ... annual $57,960

Expenses:

Taxes - $6098 (2.345% of Purchase Price)

Insurance - $1800 (Estimation)

Maintenance/Repairs (5% of PP) - $13000

Property Management (10%) - $5796

Vacancy (10%) - $6166 (10% + 1st month rent for vacancy)

Miscellaneous (Garbage, Pest, Snow Removal) - $1200

Water - $1500

Mortgage (4.00%, 20-Yr Am, 20% DP) - $15120

Total Expense - $50,680

Free Cash Flow/Mo - $606 ($7274 annual) ...$67 per door.

Debt Coverage - 1.48

1 or 2% Rule - 1.86%

50% Rule - 61.35% (Allocation to repairs is heavily conservative.)

ROI - 8.62%

CAC - 13.99%

Vacancy for the apartments are near 0%.  They have been practically 100% occupied for the last couple of years.  The property is low income, attracts Section 8 Tenants. (I have requested how many are in-fact section 8.)  I will be completely an absentee owner, property manager will handle everything. There are two apartments that need renovation that are currently not being used, this would make it a total of 11 apartments. (I do not know the extent of the renovations.)

The commercial space is rocky at best.  I would not rely on that income whatsoever.  The apartments rent above the commercial space.  Low income above a commercial property is not indicative of success.  My goal is to purchase the property at a price which the apartments will service the debt service at a 1:1; the commercial space leased would be gravy. (Taking into account adequate vacancy.  I feel 10% is a conservative estimate considering the property manager is paid to keep vacancy low.  Not to mention she manages multiple section 8 properties and has experience in this niche. In addition the property manager does not collect 10% from the Section 8 subsidized income portion of the rent as "she does not do work associated with collecting the Section 8 portion of the rent."  Therefore, management fee of 10% is conservative.)

I have even considered renovating the commercial space into additional apartments in order to keep a more consistent stream of income.  To reiterate, the commercial space is not reliable and has proven to have quite a bit of turnover in the last couple of years.

The bank terms are exact.  I am currently a commercial lender with the Bank that would offer said terms. (I prefer the longer amortization in order to give flexibility in payment if vacancy/repair cost does in-fact become an issue.  I will prepay the note during good years to reduce principal drastically.)

How do you guys feel about the deal in general? It is located in a decent area surrounded by commercial business.  The town's commercial sector is not the best, quite a few business are leaving, growth is stagnant.  There was a Bank of America directly adjacent to the property which would attract business to the commercial space.  This has since closed.  There are small mom and pop shops all around this area.  Rather busy during the day and evening.  

In addition, I am exceedingly nervous in terms of the repairs/maintenance associated with a Section 8 rental.  I do realize this will come down to tenant quality which will be the managers responsibility.  I have heard horror stories of massive repair bills from low income tenants.  What are your guys' experience? (In my mind approximately $100 in repair/maintenance per door or 5% of purchase price is exceedingly conservative.)