Case Study: Deal that just went under contract

[Scott French]

Hey BP people,

I have been lurking for awhile and decided to sign up and start contributing. I heard today that a property my partners and I were looking at, and passed on, sold for more than we were willing to consider. Here are the case materials:

The building in question contains 4 units, each with one bedroom.

Gross was $2350. All utilities separately metered, with LL paying water, sewer, trash. Water/sewer rates here are roughly $3.50 and $2.50/CCF. Trash $50/mo.

No offstreet parking, no laundry.

Although the exterior was well maintained, the apartments were dirty, with smoker tenants, half-kitchens, and were dreadfully outdated (more like barren). It was a C- class asset. Needed new carpets/flooring throughout, some actual working appliances, paint, etc. I figured a $5000 initial capex budget to address some of the issues with some of the others occurring as tenants moved out, probably totaling in the $12,000 range by the time we were done. These things would be necessary to fit the renter profile that we are targeting.

The 2% rule is wishful thinking in my market, which is a college town, and a 1.5% gross is more fitting. The 50% rule is more reliable, but with the 1900 vintage buildings here, there can be landmines that will create major issues for a buyer down the road, so I tend to gravitate towards a 60% rule. With the $12,000 of capex identified, and knowing my market fairly well, I decided that an offer of $x was reasonable.

Let me know if I forgot anything and I will add it.

Respond with your estimations of list price, your offer price, and final sales price and in a few days I will give the answers.

[Will K]

Scott French I am looking at something similar in your region, I almost thought you were describing my property!

The property I am looking at is 4 units but they are 2BR/1BA. They currently rent for $635/mo, but LL pays all utilities (about $9,600/yr). Building is old but has been renovated inside fairly recently, so somewhat new appliances, cabinets, etc. Building is currently owned by a social housing program who has rent limits, so when they sell I aim to reposition it to tenant-based utilities and increase rents to market rates (about $750/mo).

Just to give you an idea, the property I described above is listed at $130k, but I plan to offer around $100K for it (primarily because it’s an hour away from me, and paying anymore would not generate sufficient cash flow for me to put up with the headache of an out-of-town property.

I consider my building a pretty good deal. For your property, I probably would not offer more than $120k, based on how you described it.

Disclosure: I’m a newb at this, and I have not ever owned a rental property