What is a Good Price for this Package Apartments

Question

Ive come across this package "deal" These are apartments in a good area of LA

20 units: $89,508 Annual NOI

60 units: $185,100 Ann. NOI

30 units: $167,975 Ann. NOI

16 units: $63,253 Ann. NOI

Ok. these are on the market and if you purchased them individually it would be $ 7,523,900.

If bought altogether price is $6,200,000

If you choose to finance: 1,200,000 mimnimum down. I/O 7% for 3-5 years

Is this a deal? Does package price need to come down @ all? please help I am stuck on this and am not a finance guru by no means.

P.S. Buyer only pays Escrow  fees of $1500-2k!
and buyer receives $40k-$80k upon escrow close

Jon Holdman · Answer

Daniel,  Cash on cash is the annual cash flow divided by the cash you have invested.  My number is a bit high because I'm ignoring costs.  I'm not entirely clear on the situation, but sounds like your closing costs may be partially covered.  More on that below.

Tom, To get the $5 million, I just adjusted the price downward until the cash on cash return was about 20%.  I assumed the down payment was 20% of the price, since your $1.2 million figure was about 20% of $6.2 million.

The cash flow and cash on cash return number are before taxes.  Impossible for me (or anyone here) to account for taxes since that depends on your personal situation.

I'm pretty confused about this situation.  You say rents are $1100, but the bank took a third to update the place.  What does that mean?  $450 won't update much of anything.  You say you had rent rolls.  The rent rolls should state how much each tenant is paying.   That's the figure you want to use.  Maybe you mean the place is a dump, and the bank cut the rents from $1100 to $650 to get tenants in there.  That's bad.  That means you have a bunch of tenants in place who expect $650.  It will be impossible to get those tenants to $1100.  So, you will have a long phase of getting the current tenants out and getting new ones in.  But, I could be confused.   What does the rent roll say?

Yes, if the gross scheduled rent (i.e., what someone would pay to rent one of these units) are $1100, then that makes this a much better deal, even at $6.2 million.

I assume $1100 is an average rent, and that you have various unit sizes.  126 units all exactly alike is a very poor unit mix.  You need some variety.

If the place is run down, you have to account for the fix up expenses and the rent lost while fixing up and filling up the units.  If its really a dump, and everything around it is a dump, you may have a real challenge with these properties.

Have you ever done a deal like this?  Do you have a few hundred grand over and above the down payment readily available to put into this deal.  If either of these is no, I think you're biting off a lot.  Certainly I personally would not attempt to just from a few SFRs where I am now to 126 units of dumpy apartments.

Don't be fooled that the bank is paying some of your closing costs.  There are appraisals and environmental surveys that will need to be done, too, and insurance to buy.  Does the bank pay all of that?

If these are 100 year old buildings in the LA area, what's the seismic situation?  Will the city force you to do a major seismic retrofit is you buy the buildings?  What about lead paint (guaranteed its there if these are pre 1978, but whats the condition)?  Asbestos?  This is the sort of stuff the environmental survey will reveal.  Does the selling bank have one?

Have you driven by these and the area?

Jon Holdman · Answer

Insufficient information to evaluate these buildings.  The NOI is almost certainly overstated, since I'm sure that number came from the seller or listing agent.

What are the rents?  Are the rents at market?

I'm one of those guys who lives by the numbers.  If a deal doesn't work, its not worth buying.  Owner financing is a sweetner, but it can get you into trouble.  The owner's willing to let you get into the property more easily than a bank would.  But then you just end up losing it because it doesn't work.

Owning real estate is a means to an end.  The end is to make money.  Rental property either has to make money based on cash flow or there has to be some appreciation play.  I continue to think is very dangerous to count on overall market appreciation, especially in CA where you have a non-functional legislature and an ugly economic situation.  Great place to live, but jobs drive demand for apartments, demand drives rents up, rents drive value up.  Without jobs, values will be stagnate.  So, IMHO, your only appreciation play is if you can get in, force some appreciation, and then sell the place quickly.

You say "his would be a long term investment".  So, it has to make money every day.  Looks like an average of $49K per unit.  If the average rent is something like $800 or more, this might work.  I suspect Brain's estimate of the rents is low, because he's assuming rents are at least double the NOI.  My guess is that the rents are lower than that.

Daniel Fernandez · Answer

No Jon I havent. So i believe you to be exactly right. Yes the rent rolls do say an avg of 650 for the rent. So im thinking something isnt right, it may be the management who gives up the rents, Ill have to ask if its being done that way.

Would it be a good idea to call the management offices and find out how much theyre renting for? If its too low im gonna have to pass.

Daniel Fernandez · Answer

Thank You all. On the rent rolls the rents were calculated at 650. The former owner let one of the buildings get run down, when he got out of the picture the bank stepped in and was mandated to bring this building up to code. so they took a % of rents from all the buildings to cover the work. After the work was completed they kept collecting and that those rents were to go to the new owner. I dont know why they wouldnt just keep these rents for themselves?

Jon Holdman · Answer

Sorry, but someone is feeding you garbage information.  A proper "rent roll" will be a listing of each unit, along with the name of the tenant, the date of their lease, the term, when they last paid, and the amount of the rent they pay.  If they're paying $650, it will say $650.  If they're paying $1100, it will say $1100.

If the former owner is out of the picture and the bank has repossessed these buildings, they are now the owner.  Saying they took a percentage of the rents just doesn't make sense.

Now, perhaps there is a property manager in place, and the bank is requiring the manager send them a percentage of the rents and allowing the management company to keep the rest.  Based on those numbers, it might be the management company is being allowed to keep 60% while the bank is collecting 40%.  But the rent rolls should still show the amount of the rent, not the amount the management company is keeping.

Something just doesn't make sense here.

Have you ever done a deal like this?

Jon Holdman · Answer

You really need to know the current rents.  Yes, calling each of the buildings would be a good idea, as would calling nearby buildings and checking the newspaper, craigslist, etc.  Something's not adding up here.  You need to know what people are paying right now for rents, and buy based on that price.

Brian Levredge · Answer

Jon is pretty much dead on.  I would count on having an engineer conduct a thorough inspection of all the buildings.  If these are "soft story" buildings or they are raised foundations on cripple walls, you are talking about tens of thousands, if not hundreds, in retrofitting.  
                    
                    You will also want to pay a visit to code enforcement as well.  They can tell you if anything has been red tagged, which both the seller and the bank could be aware of and are trying to pass on the next owner.  If they are willing to give you 40-80k at close, I would imagine there is probably a lot more work than that amount will cover.   I would also call the LAPD (South West Division or Rampart).  They can tell you if those are neighborhoods where they send single or multiple responders on calls.  If it's multiple responders, then it is a dangerous area.

Jeffrey K. · Answer

He is going to think it is better.  You should try to get it at the best price, not a fair price.  I dont think you are a realtor so you should be trying to get it for the least you can.  If you want it for 5.5 why not offer 5? When you are talking numbers like that 500k is a drop in the bucket for some of these banks.  I just got a package offered at close to 2 for 825k and the city thinks it is worth 4.5.  Use your own numbers and trust your gut!

Tom M · Answer

Jon,
How did you back into a price of 5 million? I'm assuming, you first started with the cash on cash you wanted and then work backwards somehow?

Daniel Fernandez · Answer

Thank You Jon. How do you calculate cash on cash return did you take 1,222 and divide by Money down? The rents at these places are actually 1100/unit so knowing that what do you think.

Thanks again

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