12 Unit, Newbie, Inspection Pretty Rough

[Kelli Berg]

Hi All - 

I'm a real estate investing newbie here.  We've been looking at apartment buildings as often as they come onto the market for the past year. What I've seen are complete disasters, pretty close to unlivable to my standards, but the rental market in this community is in high demand because of lack of units.  

We found a 12 unit building built in 1974, in decent shape from what we could see.  All units are 2 bed 1.5 bath. We toured 3 units, two updated and well kept, 1 ok.  I was told the rent was $650 average per unit. Landlord pays gas, electric, garbage, water (average about $1,500/mth). We put an offer in at $435,000.

Later, we came to find average rent is actually $637, includes a HUD tenant ($550), and sex offender. We had inspection, and wow, quite rough. Pests, water damage from upper bathrooms in lower two levels (about 8 units), dirty, balconies in need of repair, older windows, older roof (though claims only 4 yrs old), about half have new furnaces/ac/water heaters. Cosmetically, 10 need updated. All but 2 had original cabinetry and counter tops. Some carpet and linoleum is updated. 12 garages included, but issues with the wiring, needs paint, lock system, etc. Overall, the whole property needs some serious TLC and about 10 new tenants.

When talking to the owner, he suggested that he would evict the HUD tenant based on property damage, and raise all rent to $700 before he sold because he knows it's too low (to me this screams turnover and lost income... though I don't think it would take long to fill it back up due to demand, but lots of time, energy and $$ to get them up to standard).

Overall, I do believe my vision would work... fixing it up, only allowing qualified tenants, and making it a nicer apartment in the community (I think we could get $750).  However, it will take a lot of work and a lot of repair.  Just curious if anyone has come across something similar.  My mindset would definitely be to lower the offer (offer was based on seeing leases - all rents lower than stated at time of initial offer, and second the inspection showed that the property is not worth the initial offer). My husband has construction background and I would manage the facility, turn apartment as needed, etc. We would need to hire electric and plumbing. Just curious if overall one would believe no matter the amount of time, work, and repair, it will be a solid investment... or am I looking at a money pit.

Also, this is a buyout - a brother is leaving the operation, so the other brother buying the property is selling it to pay off another property even though he has 184 other units. He "doesn't have to sell" but will... Story seems a bit fishy too.

Anyway, any expertise and wisdom would be appreciated!

Many Thanks,

Iowa Newbie

[Jaysen Medhurst]

@Kelli Berg, you may have a good deal, if you're willing to take on the due diligence now and stabilization later. I would calculate a new offer based on what the place is ACTUALLY worth--i.e. NOI x Cap Rate. Then start subtracting based on how much additional capital you'll have to invest and how much time/effort that will take.

Back of the envelope says ~$45k NOI your initial offer is just shy of 10% Cap Rate, which is above average. If you could get it for $350k and put another $100k into CapEx, you might have a real winner on your hands. Forced appreciation close to $100k. And if you can submeter the utilities...that's an easy $180k in forced appreciation on top of it.

Good luck, let us know how it goes!