8 unit in ohio

[Aaron Smith]

Hi there BPers,

I have a deal in a D area.  Mistake #1 right?  However, I think the property is selling a very nice discount. The rents maybe 50-100 under market.  Details:

$175k, 8 units, built 1966, $450 each unit rent

assume 10% vacancy, 55% expenses, 4% interest rate, 25% down.

Before raising the rents (basecase), I get 1.85% monthly rent to purchase price (2% rule)

2.33 debt coverage ratio, 10 CAP, 21% cash on cash.

All in all, not too bad.  I'm unaware of the condition inside the units (outside looks good) and what would take them to get up to market rents, but the numbers look good enough to make an offer.  I figure, despite it being in a D area, if I can create value and raise rents to market, it could be a good investment.  However, selling may be the issue, because of the area.  What does everyone think?

[Tim Davis]

Aaron...Let's face it.  Property management is a business.  A business entrepreneur is looking to maximize his time to make as much money as possible in his business.  "D" properties in rough areas are going to take more time because you typically have deferred maintenance, problem tenants and lower rents.  This equates to lower management fees, more work and more time spent.  It is not that you can't find a good property manager to manage and do a good job it is just that they are going to be limited by the time they have to work on it.

In my business I limit the percentage of units that we have that fall into that category because I know how management intense they are.  These type of units are not easy for anyone to make money on.  Investors have a difficult time with them also.  A property like that will not appreciate like "A" or "B" properties, nor will it bring the higher rents.  Hope this helps to gain perspective from a property management point of view.