Opinion - 8 Unit Bldg
I'm looking for my first rental property and would appreciate the feedback from experienced investors/landlords out there on the following property:
8 unit apartment building. 4-2 bedroom @ $575 mo.; 4-1 bedroom @ $475 mo. ; Taxes $2600 annually, insurance $3200 annually, water/sewer/trash $1500 quarterly (tenants pay electric). Seller asking $375,000.
According to the listing agent, the rents are very low (I found other 2 bedrooms in the area for over $700.) There are 2 current leases, the others are mo. to mo. There is little vacancy - according to the agent, it is because of the low rent. The realtor mentioned that several Section 8 tenants have recently lived in the building and their rent was about $100 higher than the current rent.
The property clearly could use some tlc. It was built in 1900 and the realtor guesses the wiring was installed in the late 1960s. No new major appliances (water heaters haven't been replaced recently, etc.) and comments from some tenants (although I couldn't see the units-the seller wants a written contract first) are that their units need significant cosmetic work (new drywall, carpet, etc.) Also, the building is in a small isolated town (MD) across the street from low-income housing. It will be a long time, if ever, for the town to experience any significant economic growth.
I ran the numbers and it would produce income the first year. My major concerns are the expected maintenence of such an old building that clearly needs some major initial investment and dealing with lower income tenants. Would the income from the property make it a worthwhile deal?
Thanks for your feedback.
Be careful trusting what anyone with a vested interest in the deal (IE: a realtor) tells you. Verify all assumptions and all claims. I don't know about you, but the market is real slow here. Most renters don't even have a full down payment and you have to split it up.
If you think it is worth it, sign a P&S with him with a 30-60 day due diligence period (get it as long as you can) and check it out!
JohnCl
How much are you planning to put down to make this cashflow from the start.
Unless you are certain that you can raise rent to closer to $700 month after purchase the price seems high to me.
Be very carefull with comprable rents, there are many factors including location, size, condition, location, and etc. Just becasue something in the same town gets $700 does not mean that this one is worth that - im not saying its not thought - just look into all factors.
Keep in mind that you don't buy a building, you are really buying the leases! One of the customary items provided by the seller should be a rental history 1 - 2 years for each unit on a spreadsheet. If it's not provided, it's a red flag. Also in you due diligence require that you review 1 - 2 yrs. bank statements for the property. Your situation is not unusual. In your negotiation, make your offer on this or any multi family contingent upon signed leases for all of the tennants / units. Belive me the seller will get it done. Be sure the numbers work with the lease amounts. If not the price goes even lower. Sign an offer contingent upon your acceptance of these as well as some additional items. If things don't measure up, you can pull out of the deal.
I am not an expert, just a contributor. There are additional considerations to consider. Click on the Commercial tab of TCI and read it's Forums, especially the MultiFamily Forum. There is a wealth of info about CAP rates, ROI, etc.
Good luck.
Ras,
Based on what you have posted, the seller is asking too much. However, if you like the property, I am near by, and would be willing to work with you. You can go to my profile to email me.
Bruce..
What primary metric are you using to determine if this is or not a fair price? The cap rate is 10% (if I have that right), wouldn't that put it in a good range? What is th lowest cap rate that would make this a desireable property? The reason I ask, I've just started looking at the number for a property with a cap rate of 11.5%.
Gross income is 4 2-bed x 12 months * $575 per month + 4 1-bed x 12 months * $475 per month. Total $50,400. Expenses are $3200 in insurance, $2600 in taxes and $1500 x 4 quarters in water/sewer/trash. Total $11,800. So NOI is $38,600. divided by the asking price of $375,00 is 10.3%. Right?
Is 40%-50% of GOI regularly spent on maintanence? That seems like a prohibitively high number, few properties could produce any profit with that level of expense.
Your use of the rule of 72 is new to me, I've used a "rule of 72" to calulate percentages on investments and doubling time. So you're saying that a 6 times gross is a starting point, a minimum or the goal?
How are you calculating the debt service ratio? Don't you need a number of other pieces of information to determine that? My previous experiece with "debt service ratio" is P&I/Income.