9 Unit Opinion Wanted!

[Dan Sears]

So I am looking at a 9 unit house/apartment. 

Cashflow is 30k per year after all expenses. Not including debt service. This is setting a 250 reserve per unit also. I know this is rather vague and maybe not enough info to give a proper analysis. 

(5) 1 bedroom 1 bath

(4) 2 bedroom 2 bath

Most everything is driving distance but within a 10 minute drive.

Unemployment rate in the city: 5.8% 

Population: just over 100k.

Here are some of the Pros and Cons that I was able to get myself while visiting the property

Pros:

School District is very good

100% occupancy with mostly long term tenants.

Rents are SLIGHTLY below market, but not sure if ill be able to raise them currently. Read Cons)

Building is is good shape.

Rooms have nice hardwood floors.

Cons:

House was built in the 60s so it has original windows. 

Roof is about 10 years old and looks to be in roughish shape. No leaks from my tour that I could see. (inspector will look into this more.)

Driveway needs a little work. Still usable but could use a resurface. (not cheap)

Tenants smoke in the building and their room. (this would change under my ownership.)

Tenants are on a month to month (I would also force 1 year lease a couple at a time.)

The tenant mix in the unit next door (separated by a fence) is a little rough. Appears to possibly be section 8. (this is the reason I do not feel the rent raise is quite yet justified.)

What im wondering is what would you pay for a building like this? Or any other advice you would give on this property. I did recently send out a LOI which I will reveal later, but would like to hear any and all thoughts or questions first.

[Ben Leybovich]

1. Tenants are not going to stop smoking just cause you tell them. You will need to upgrade your tenant base. This will mean huge economic losses for 18-24 months.

2. In order to do that, you will need to spend $7,000 - $10,000 per door by the sound of it.

3. Since you are saying that raising rents will be tough, I am not sure that you ca spend this money, unless you buy it down at the front.

3. The basis of underwriting what you'll pay is the following process:

a) Figure out what the thing is worth based on income and in perfect working order.

b) Subtract the amount it'll take to get it there.

What's left is what you can pay - this is the Cash on Cash underwriting method. To take this further, cross over into the IRR, and you will quickly realize that unless you can force appreciation, in real terms you won't be too happy.

Without knowing specifics, and guessing on everything, I'd say that $30,000 of NOI, if you are not able to force appreciation while having to spend $50,000+ on the building is not worth more than $250,000. If you are able to force appreciation $100,000 having spent $50,000 then perhaps you can pay a bit more...

Good luck!