Advice on First Deal - lemon or an opportunity?
I'm getting closer to making an offer on an out-of-state class C buy-and-hold multifamily property. I'm looking for a >10% cash-on-cash return. However, I've seen the full income statement from the last 2 years, and the previous owner hasn't been making nearly as much as I would expect, mainly due to high costs.
First question: should I be worried that this is a lemon... or is it an opportunity?
Income and Costs (all numbers are annual)
Nominal rent - 43.6k
Actual rent - 37.3k (14.5% vacancy. 33% turnover rate)
Management - 4.5k (10.6% - could bring down with a PM switch)
Maintenance - 5.0k (11.6% - ok, older building and a fair amount of tenant turnover)
CapEx - 2.4k (5.4% - mostly plumbing costs: is that a worry?)
Tax - 2.6k (6%)
Landlord Gas Water Heating - 1.3k (2.9%)
Landlord Gas+Oil Heating - 2.8k (6.5%)
Landlord Other Utilities - 5.5k (12.6%)
Insurance - 1.1k (2.6%)
NOI - 11.8k
Lending costs - 8.6k
As is, cash on cash would be 5.5%
Is (eventually) getting 10% cash-on-cash realistic here? Where is this going wrong, and how would you bring up the income? Or should I be bringing down my offer a lot?
Agent and I agree that a oil-to-gas conversion would pay off very quickly. Split metering for gas heating and hot-water might be a pricier but good longer-term investment.
Thoughts?
Thanks!
--Aaron