About to make an offer on a small apt complex

[Mark Yuschak]

I'm considering a small apartment complex. It's a 19 unit. 18 one bedroom units, and 1 efficiency. All units have appliances furnished by the landlord.

There are currently 5 vacant units, but that's because they are undergoing rehab. There is a waiting list for people to live in those units once they are done. That's per the property manager/selling broker (he's acting as both currently). The current rental mix is low income/state aid. Only 4 tenants pay their rent in cash...all the others are on aid.

The 18 1 bedrooms rent for $295 per month
The 1 efficiency rents for $225 per month

All units have been rehabbed except for the 5 which are in process. The tenants pay for their own heat, which is electric. There is no natural gas on the site. The landlord pays for the water and sewer.

The roof was replaced with a full tear off within the past 8 years. There is no deferred maintenance. The only outstaind maintenance thing I see is the parking lot. There are some large asphalt holes which need to be filled.

Here are the expenses per year:

2400 - Insurance
7000 - Taxes
600 - House Electricity ($50 / month, high estimate, only 5 lights run off this meter)
500 - Snow removal (not a huge parking lot)
5200 - Property Management - the current PM charges $100 per week
6642 - Maintenance - I allocated 10%, but that seems very high considering everything has been rehabbed
1000 - Dumpster
8500 - Water/Sewer
9963 - Vacancy

I know the rents are low for the area. I even questioned the PM about it and he said the owner wanted to get people in there to help off set his monthly losses (the owner was a HML and his borrowers defaulted and left the place in shambles). There were only three occupied units when the owner took the place back over after the borrowers defaulted. Since it was vacant with no heat, all the vacant units had water breaks. That caused the rehab. So, as he had them rehabbed, he rented them for $295.

I expect to be able to raise the rent to $325 on all the 1 bedrooms, and $250 on the efficiency.

Plus, the owner (the HML) is willing to do an interest only loan on the property at a 10% interest rate. I'm not sure what duration he's considering. He wants 20% down though.

They're asking $200K.

I think my maintenance reserves at 10% of income are pretty high considering the fresh rehabs. There is an opportunity to add coin operated washers and dryers, too.

I'm targetting an offer of ~$160K given the up side. What do you guys see here?