What would be a steal?

Question

Hi everyone!  I currently own rental houses and want to make the jump 20 unit building, four of which are commercial spaces.  This is a what would you do question:  The building is 100 years old and mostly made of 1 bed apts that are fairly run down, and renting for 350 to 450/mo.   The tenants are all lower middle income and seem very content. The building is 24000 feet with lots of hallwys and public areas, and typical 1 bedroom is around 750 sq. ft.

Note: this would be a cash purchase with no debt.

Calculated the NOI of $31k as follows:  
Gross Revenue: $101,000
Taxes, Insurance, Utilities: $27252 (verified)
 All told, the Gross Revenue is $101,000 per year.  Having veriified the utilities and taxes and insurnace, and allocating $27,252 (verified)
annual repairs/upgrades  $20,000  estimated
annual upkeep, paintining, etc., $12000 estimated
parttime maintanece man $6000
All told: about 69K  
My CAP rate, if using the asking price of 265K would be 12%

Note, I could own that building 20 years and never ever be done with upgrades and improvements.  I live 12 blocks away from the building and would manage it myself.

So, wise people, assuming the future looks like today, what would be a steal of a deal for this property?

Thanks!

Will Barnard · Answer

Mitch, don't give up yet. Use that info to your advantage! Make an offer based on some of your own assumptions leaving lots of room for upside potential. You never know, you just may be able to steal it!

Mitch Bernay · Answer

Really, Will?  I'm surprised -- what would you do -- come in on straight building value?

Mitch Bernay · Answer

Thanks to everyone who replied!  Just to let you know what happened . . .  I informed the seller that he could expect an offer in the next day or two, but that among other things, I would insist on seeing the bank deposits for the last two years to verify the income and timeliness of the rent payments, and also verify the building expenses.  Without missing a beat, he told me that "it's impossible, they all pay cash and my bookkeeper didn't deposit everything."  Needless to say, I've decided to pass on making an offer.  BTW: what a great web site!

Will Barnard · Answer

make your offer and pay based on the current incomes with the upside potential kept to yourself. If you know you can get the lower income units up to the $450 range and increase yoru gross revenue by X%, then you know your upside value (of course after you factor in the management and accounting costs). Agin, I would be looking for something more around a 15% cap based on current income, so if you can get it tehre, you likely have a good deal.

Keep in mind to check very carefully on the soundness of the foundation/structure. being so old would cause me some concerns.

Mitch Bernay · Answer

Thanks for quick replies.  Yeah, there is a vacancy factor figured in of one unit every three months -- there just isn't a lot of low cost rental apartments in this area.  I think the 69K is conservative, but also realistic.  The upside is that there is potential to add three additional units gradually raise rents as tenants move out and I spruce up the units -- no reason the 350s couldn't be turned into 450s. Totally forgot to figure in a manager's and bookkeeper's fee!  Thanks Mike!  Back to the spreadsheet!

Mike Jakobczak · Answer

I agree with Will 100%

regardless of you self managing this investment I'd tack on the expense of property managers for this type of investment.  5-6% on income, or whatever the rate is near your area.

When you go to re-sell (if ever) chances are a new investor will not be so hands on and will look at the actual expenses/income and evaluate bringing your cap rate much lower, which will bring your overall value of this property much lower.

Will Barnard · Answer

You did not list a vacancy factor, accounting/legal expenses, advertising etc. unless that is grouped someone in your figures. If so, then as you listed the expenses, you are at 70% expense ratio (69% to be exact). That is on the high side so a few things need to be determined. Is that a conservative estimate and is there some upside potential to decreasing expenses (for instance, adding a RUBBS system).

Next, 12% return where I have to self-manage is too low for my tastes. You can make that return passively all-day long (of course that 12% is only considering cash flow. Plus, your expenses do not leave much room for debt financing. yes, I know you choose to pay all-cash, but you must have alternative strategies which would allow for debt financing in the event you needed it and if a building does not support that, you may want to look elsewhere.

Bill Gulley · Answer

Welcome to BP! 100 years old, I really check the foundation closely, it's been there this long without issues, it may stand another 100, but check closely along with all other issues.

$230, 000 would be my start cash wise, some harder nose types here may say less. Might end up lower, depends on what is wrong. 1 bds have a reputation for high vacancy especially in lower icome levels.

Being close by is a plus, will you ever move?

What would be a steal?

Most Popular Reply