Apartment Building Deal Analysis

[Keith Linne]

We have an off-market 18 unit apartment building under contract, with a mix of units (1 studio, (6) 1BR and (11) 2BR units).

I own 10 units in the area; however, they are a mix of 1-3 unit buildings. I'm much more experienced with 1-4 unit deals, and as such, I'm hoping to have a few additional sets of experienced eyes take a look at these figures and provide feedback. 

Purchase Price: $1,410,000

Financing: $1,125,000 assumed CD @ 5% interest only, 4 years remaining on term ($285,000 down payment @ 8% interest only, to match CD term of 4 years - privately raised)

Income: $164,016 

Monthly income breaks down as follows: 11 2-bedroom units @ $795 each, 6 1-bedroom units @ $695 each, 1 studio @ $541 each, 12 garage stalls @ $50 each, ~$200/mth laundry income

Vacancy (5%): $8,201

Gross Income (after vacancy): $155,815

Taxes: $18,000

Insurance: $7,000

Maintenance/Repairs (3.65%): $6,000

Utilities: $17,000

Property Management: $18,144 (1/3 first month's rent for each unit + 8.75% management fee)

Total Expenses: $66,144

Net Income: $89,671

Debt Service: $79,450 (this accounts for 5% interest only CD/8% interest only down payment)

Total Cash Flow before Value-Add: $10,221

DSCR: 1.13

Purchase Cap Rate: 6.4%

All units are currently under-rented, and they should only require very light cosmetic work to turn. Vacancy rates for market are 3% (running everything at 5% regardless). Projected figures:

Income: $201,300

Raise rates as follows: 11 2-bedroom units @ $1,000 each, 6 1-bedroom units @ $725 each, 1 studio @ $625 each, 12 garage stalls @ $50 each, ~$200/mth laundry income

Vacancy (5%): $8,201

Gross Income (after vacancy): $155,815

Taxes: $26,000 (increase due to updated sale records with county)

Insurance: $7,000 (used this placeholder in "existing" even though it's based on projected value)

Maintenance/Repairs (3.65%): $6,000

Utilities: $2,400 ($2,400 - will move all tenants to ratio utility billing, which will be acceptable based on market, cover common electric only)

Property Management: $22,269 (1/3 first month's rent for each unit + 8.75% management fee)

Total Expenses: $64,055

Net Income: $127,180

Debt Service: $86,981 (after refinance into commercial loan of $1,125,000 - 15 year maturity, 5 year lock, 25 year am, 6% interest)

Total Cash Flow after Value-Add: $40,199

DSCR: 1.46

ARV based on market cap (7.5%): $1,695,000 (value add of $286,000)

This type of building does not come up often in my market, so I'd love to make it work; however, I also want to be certain I'm not emotionally invested or overly optimistic. Any feedback is greatly appreciated. Thank you!