First investment: 16-plex apartment building

[Marc-Andre Bordeleau]

Hey guys thanks for coming. I was looking at this apartment complex and ran the numbers on BP's calculator and thought I might as well ask for your opinions on this deal. I think it looks like a solid deal on the outside.

Asking price: $1,760,000

Offered price: $1,250,000

Down-payment (30%): $375,000

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Income per month: $12,300

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Taxes: $1,164

Insurance: approximately $415

Repair and maintenance: $985

Heating and electricity paid by tenants.

Lots of renovations done to it in the past 5 years.

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CoC: 7.15%

Cap rate: 7.08%

Here is the analysis link.

https://www.biggerpockets.com/buy_and_hold_results...

Let me know what you guys think!! Thanks.

[Roy N.]

@Marc-Andre Bordeleau

We are looking at 16-unit with comparable revenue (actually a little higher at $12,500) - on the expense side, our taxes are much higher, so in the end they would be close.

Be certain that you have not underestimated the expenses.  Though the tenants are paying their own heat and lights, you will still have a house electrical meter for common areas, expenses for groundskeeping (snow removal, lawn care), water and sewer, garbage collection, janitorial, pest control, administration/accounting/advertising, etc.   You should also make allowances for economic vacancy (10% if you do not know the actual physical vacancy, loss to lease, turnover, eviction and legal); maintenance (10%) and Property Management (7 - 9%, even if you plan to manage on your own).

When I plug-in typical local values for the above, given the revenue you presented, I get a CoC in the range to 6.25 - 6.5% ... at your purchase price. The (M)IRR is also not that impressive (less than 3.5%).

When you factor in your closing costs (probably $16 - $20K), the price you are paying for the net income (essentially the Price to Earnings (P/E) of the property is around 5.0 - 5.25.  In my experience, I get wary anytime you are paying over 3.0 - 3.5 as you have no real room to handle rising interest rates or hard times.

The ask of 1.76M is ridiculous.  My guess is the current business appears to support a price more in the vicinity of $1M to 1.175M (maybe 1.2M).  Obviously there is a lot I do not know about the property and I've made a heap of assumptions on the operating cost side of the house, but unless there is some fantastic, unrealized potential with the property, don't be tempted to overpay and try to make-up for it later.   

I would also look for a lender who will be willing to either take a downpayment of 25% and/or allow the Vendor to carry-back a 10% second ... check to see if the property can meet CMHC requirements  for multi-family which will give you access to better rates and a lower downpayment ...