17 unit property in south Georgia

[Christopher Hall]

I've been looking at multifamily properties in GA, and this is the first one I've seen with a bit of promise.

• 2% rule - asking $390,000; gross income $5,600/month for 1.44%; he dropped the price to $345,000 just by talking to him which which brought this to 1.62% - getting closer
• 50% rule - $5,600 * .5 = $2,800 which would allow me to cover mortgage and still cash flow

Here is what I know so far:

• 17 units are 15 apartments and 2 offices
• The units are divided among 3 buildings (all on the same 1.5 acre). One building was built in 1970, one in 1975, and one in 1990.
• The 2 offices are currently rented at $350 each; 13 of the 15 apartments are rented at various rates; total gross income in October was $5,600
• 2 of the units are not rented, and that is due to renovations (haven't seen the property or pics of those units yet)
• All units are sub-metered for all utilities; central HVAC in all units
• While I can see which units are rented now, they don't have historical rent rolls or any historical proof of income. According to the agent - "The current owner is old school "handshake" kind of guy. This a "Small Town America" kind of property. Up until we had the property under contract a few months back, he did not have ANY leases. The only reason that we have the ones that we do was to satisfy the previous previous prospective buyers bank. Up until then, all tenants were month to month. Most tenants have been there for a long time and do not wish to move."
• Of the 14 leases I saw, 13 were 6 month leases that started on August, 2016 and end on Jan 1, 2017. The other ran until July 1, 2017. Might this be a reason he wants to sell by the end of the year? So he doesn't have to renew leases?
• This property appraised for $350,000 using the sales approach and $375,000 using the cost approach in 2011. I don’t see much way to add value unless I can raise rents (need to research).
• Expenses listed are on the marketing flyer.  I can vet most of these; it's the expenses I don't know about that I can't check out.
  
  • Yard lights and water heater ($470 / month) – $5,640
  • Landscaping - $800
  • Garbage and water ($206 / month) - $2,472
  • Insurance - $1,880
  • Taxes - $3,079
  • Repairs and upkeep - $2,000
  • Misc - $400
  • Total - $16,271

The expenses seem light – I know I’d need property management and vacancy included – which is why I also looked at this from the 50% rule.

Here are some questions I know I need to ask:

• I need to verify the expenses with the companies, tax offices he pays
• I need to get my financing in order. So far one bank (about the only I've talked to) said 75% LTV with 5.5% fixed over 5 years; reset every 5 years with maturity @ 15 years
• Eventually I would need to run test ads to see what the rental market is like in the area

So what are the most important steps I need to be taking to vet this deal further?  I've looked at it as far as I have the current information for, so what information do I need next?

Thanks for any help!

[John Leavelle]

@Christopher Hall

Is there any immediate rehab needed after purchase? I did not see any CapEx in your expense list. What condition is roofs in? How about plumbing and HVAC systems? You will need to build reserves for these.

Also, I am old school and live in a small town.  My hand shake and my word is my bond.  However, I am also a businessman (as you should be).  Surely the current owner filed tax returns.  They will show proof of income.  Request copies of the last 3 years.