Would you buy this deal? 6 unit Apartment ($450-500/month)

Question

I am currently investigating a deal and wanted to get some feedback from some of the investors on BP.  This is my first time requesting feedback for a deal for a potential opportunity so go easy!  So here goes.

Sale Metrics:

• 6 unit Apartment Building
• C Class 
• Purchase = $180k
• 1979 construction (all brick)
• I just started looking at this deal so I am not sure of the tenant occupancy at the moment.

My Assumptions:

• Unit Monthly Rent = $480 each - current rent ($2880 at full occupancy)

• $10k in initial renovation costs
• 20% down and finance remainder of principal
• Expenses = $821/month (all units)       (-) Cleaning/Maintenance/Repair (8% of Rent)   $2,765        (-) Insurance (0.5% of   Purchase Price)   $900        (-) RE Taxes (1% of   Purchase Price)   $1,008        (-) Property Manager (10%   gross rent)   $3,456          (-) Capex (5% gross   rent)   $1,728My Outputs:
• (-) Cleaning/Maintenance/Repair (8% of Rent)   $2,765        (-) Insurance (0.5% of   Purchase Price)   $900        (-) RE Taxes (1% of   Purchase Price)   $1,008        (-) Property Manager (10%   gross rent)   $3,456          (-) Capex (5% gross   rent)   $1,728
•  Actual Deal       Monthly Income:   $2,880 
•  Monthly Expenses:   $(1,780.98) 
•  Monthly Cash Flow:   $1,099 
• Purchase Cap Rate:   12% 
• NOI: (Annual)   $21,939 
• Total Cash Needed:   $53,480 (20% down & remainder financed)
• Cash on Cash Return / ROI   24.7%

• (-) Cleaning/Maintenance/Repair (8% of Rent)   $2,765        (-) Insurance (0.5% of   Purchase Price)   $900        (-) RE Taxes (1% of   Purchase Price)   $1,008        (-) Property Manager (10%   gross rent)   $3,456          (-) Capex (5% gross   rent)   $1,728

My Outputs:

So this is what I have come up with.  So far, the deal looks good to me but please let me know your thoughts about what I might be missing or if you have any general thoughts.  Any positive and constructive feedback is greatly appreciated. Thanks

Shaun Palmer · Answer

@Brent Coombs

Hi Brent.  Thanks for the response.  You would be correct on the insurance.  I need to up the expense.  Also, I do need to change some of the terms for the mortgage.  I did not in the above screen shot because I wanted to show the original for comparison to Jaysen.

Great points here and I appreciate the feedback.  Thanks!

Brent Coombs · Answer

@Shaun Palmer, a few points. First, Landlord Insurance may well cost significantly more than $900/y? Secondly, won't your mortgage be ~$1,000/m? And thirdly, between vacancy loss and re-tenanting costs, it may cost more than the $6,221 ($2,765 + $3,456) you allowed for? All the best...

Shaun Palmer · Answer

@Jaysen Medhurst

Jaysen,

First I want to apologize for not getting back to you.  I had your response in my inbox and somehow it made it's way to the bottom of the pile.

However, you bring up some great points here and is certainly some items for me to consider.  I am going to send you some screenshots from my spreadsheet so that you can see where I am getting my numbers from.  I created this spreadsheet and it is a great tool for my own personal use.  It helps me to quickly evaluate a deal quantitatively.  I did not change the metrics so that you can see specifically where things are coming from.  However, I will be changing this spreadsheet based upon some of your comments even though this deal has passed.

I really appreciate the time you spent on reviewing this and can only say that in my own error, I missed your response for which I apologize.

Jaysen Medhurst · Answer

Hi @Shaun Palmer, a few things to think about with the numbers:

I would figure 8% for CapEx, especially for a property that's almost 40 yrs. old.

You need to figure in vacancy. 8% is pretty standard, but check for your area.

What about owner utilities, like electricity for hallway lights, outdoor lights, etc.?

Lawn care, trash removal?

If your monthly cashflow is $1099, how to you get to an NOI of $21,939? Your NOI is $13,188 ($1099*12), right? Did I misread something above? Is the $1781 Monthly Expenses including debt service? With my numbers I show a CapRate of 7.3%. Meh...

Also, NOI is usually calculated before CapEx.

More importantly, because this is 5+ units this will be a commercial loan, not residential (like a normal SF house). Typically a lender wants 25-30% down, amortization is 20 years (not 30), which means a higher monthly debt service. Also, insurance policy is slightly different (read more expensive), if I'm not mistaken.

If this is your 1st deal (sounds like it is), you might have a tough time convincing a lender that you're ready for a commercial property.