Apartment Building - what will you do?

Question

Hi All,

Came across someone who is trying to sell this 32 unit apartment in Wyane County, Detroit, Michigan. His asking price is $320,000.

Now the seller is trying to offload property that he has just acquired. The reason he gave is that he is overcommitted.

Q1) What would the apartment be actually worth seeing that only 4 units of this apartment is currently leased. Is it still following the value = NOI/cap rate and how do I find the cap rate?

Q2) In the fact sheet given by the seller they listed the property as having a 17% ROI and the estimated rehab cost is $100,000 (this is from the seller's contractor). 
This is his calculation:

Estimated Gross Income : $206,268

Estimated Total Expense : $107,515
Estimated Property Taxes: $ 16,536
Estimated Insurance : $ 8,004
Estimated Total Expense : $132,055

Net Annual Operating Income: $74,213

Purchase Price 		    : $320,000
Plus Estimated Rehab Cost : $100,000
Total Cost		                    : $420,000

ROI : $74,212 / $420,000 = 17.66%

Now I don't know how much was added for management, maintenance, vacancy and other operating cost

i) What would you do from here?
ii) How do you make this work out?

Regards
Clara

Jean Bolger · Answer

Well, I wouldn't go near this. I'm not saying that there aren't any good investments in Wayne County, but for the risks involved you'd want a lot more potential return. I wouldn't go there without a reliable and experienced local partner who knows the area inside and out. Especially worrying on this deal: 1) 4 out of 32 units occupied? that means, as Jon said, that nobody wants to live there. Even if you do a lot of work it could be years (or never) before that turns around. Detroit has many whole blocks of housing that have been razed due to the decreasing population. Too many buildings, not enough people. This is something that can be hard for people from very populated areas too get their head around, but it is real! 2) Seller bought the place and suddenly found himself overcommitted? More likely he bought the place for almost nothing hoping he could resell to someone from outside the area who didn't do enough research. 
Not trying to be a gloomy-gus here. There are plenty of good deals in Michigan and the midwest. But I'd guess this isn't one of them.

Jon Holdman · Answer

To start with its in Detroit which has way more housing units than it has people to fill them.  So, I'd start by finding out if there is really any demand for these units at all.  "Free" may be too expensive.  The fact only four of 32 are occupied bodes very, very badly.  I know there are lots of folks out there saying Detroit is a good investment.  And, in some areas, it may be.  But many of those folks who are promoting it have a vested interest behind their promotion.

$100K rehab is only about $3000 per unit.  That's cosmetics.  I would guess its significantly more than that.

You should get on a plane and go look at the property and the area.

John Knappmann · Answer

Clara, you can never ask too many questions before you buy a property like this.  It's called due diligence for a reason.  Keep at it and the right deal for you will come along.

Clara Lau · Answer

Great Thank you all for the great feedback and advice. In fact, the area itself has a lot of apartment blocks.

Sorry, John for the wrong spelling.

When I called the seller, he sent me an info sheet with too little information. I fired back an email with what may have been too many questions.

Since I do not have much insight to Detroit and no connections there, I went ahead to offer this to someone whom I know is buying and selling properties in the area.

I have received a reply that they were interested to check this out. In return I will probably ask to be kept informed so I can learn/have insight into how the property will be analyzed and negotiated.

Joel Owens · Answer

If all these units needed was carpet and paints and a few fixtures and other items then 3,000 a door might be reasonable.

If it's a gut job on the units plan on 11,000 to 13,000 a door for stud up rehab.

With you Clara all the way in Singapore I do not know how you could attempt to take on a rehab of this level. Doesn't matter if you poured tons of money in if the area is bad it will get trashed allover again and you will lose your money.

Cheap DOES NOT equal a deal by it's own. I look for clients and myself day in and out and 90% of properties out there are overpriced and the sellers numbers are crap.

John Knappmann · Answer

I do agree that you should run, not walk, from this "opportunity".

Kaiser Akram · Answer

Hi Clara,

Here's my opinion.

1) Obtain a free estimate from your own GC. 
2) check market rents from a reputable listing agent. Do mention that it'll be newly renovated ( you might be able to command more.)
3) there are calculators to do your math bout cap rate, ratios and dcsr. BP calculators or email me, I'll send you my excel sheet. 
4) if your financing the broker appraisal numbers should also help.

Don't bend the numbers cause they are what they are.

Qs. Why did you choose Detroit ? Given the present news.

Thanks.

Kaiser

John Knappmann · Answer

Raymond, I kept thinking that somewhere was a link to a listing, maybe on Zillow or Realtor.com.  I saw the line about only 4 leased, but somehow skipped right over the 32 units in that line.

Oddly enough, I think I was so distracted by the typo spelling of Wayne that I missed the other crucial facts hidden right in front of me.

Raymond B. · Answer

John Knappmann,
Here is a copy of the First sentence in the OP's post:
Came across someone who is trying to sell this 32 unit apartment.
Here is a copy of the First sentence in Q1:
What would the apartment be actually worth seeing that only 4 units of this apartment is currently leased.

Raymond

John Knappmann · Answer

Jon, I agree with all of your points here.

My question is, I can't see from any post in this topic how many units we are talking about.  Is my computer missing something that shows the actual listing?

Apartment Building - what will you do?

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