7 unit building in Baltimore - should I pull the trigger?

[Michael Yan]

7 unit apartment building in a very desirable area right next to a local university. The property is 100 years old. New roof. Windows have been replaced. The building is in working condition but lots of small repairs needed, all units are tenant occupied. Heating is for whole property. Right now owner pay for heating cost but if I buy it I will divide cost and have tenants pay their share.Kitchen and bathroom are functioning but old. Some toilets are loose. Outside brick wall need to be re-pointed which would cost around $50k. Electric are fused based and need to be upgraded at some time, which will cost $17k.

No cash flow first year. Second year hopefully I can get the heating cost as positive cash flow. Then hopefully I can raise rent and get more cash flow...

Total year rent: $77,040

Property Management 8% $6,163

Vacancy 5% $3,852

Taxes & Rental $12,676

Insurance $4,256

Repairs Residential $3,500 (actual, according to seller)

LL Electric and Gas(Common) $7,308 (mainly heating, which I hope to have tenants pay)

LL water $1,878

CAPEX set aside $4,800

Other expense $1,500 (actual)

NET OPERATING INCOME $31,107

Price $640,000

Capped rate 4.91%

FINANCING

Cash From Buyer 25.00% $160,000

First Mortgage $480,000

Closing Cost estimate $20,000 

[Russ Smith]

If I understand the numbers correctly, if you were paying all cash for the property (which I realize you are not), you'd be earning less than 5% on your money (NOI/Price).

Not to mention that you have an old building with some pretty costly deferred maintenance issues (re-pointing the brick, electrical is old, heating is not separated) that will cost you tens of thousands of dollars over the next several years.

A low single-digit return on a property with lots of Cap X upcoming doesn't exactly get me excited.  Maybe I'm missing something or maybe you're operating in a tough market where deals are hard to come by but if you're outsourcing the property management anyway, you could in theory invest in any market.  There are better returns out there.