Buy Apartments? Can I?
I have seen a property that I am Interested in. But since I have never bought property before I was wondering how hard would it be to buy a apartment complex at age 23, with no previous RE experience, and a part-time job. It is a 16 unit,650k building and owner will finance. Any help would be great
BTW- Owner says he has a Net Operating Income of 39k and were built in 1972, just for more information..
from what you say its not a good deal.
Ok here are the details on why its not. You say a NOI of 39k. But thats BEFORE DEBT SERVICE. Let say he finances the whole of 650k( you have not mentioned how much down you are putting,so I assume 100% financing) at a conservative 8% amortized for 30 years your total debt service is
Monthly Payment $5,033.49
Debt Service $60,401.83
So you see from that you are paying more than you get from the property.
And I have not even gone into the repairs for the property,the vacancy rate, the three years audited financials you need,the property taxes info,the tenant profiles,the lease agreement. If you need a full checklist of what to look for,I will post it on this thread so that you can do your due diligence for next time
Let this pass!
He may net 39k, I'm sure he didn't pay 650k for it either, the important question is what will you net?
Why would he give up 39k and carry the note for you? Evidently it's to his benefit to take money from you rather than from tenants or hiring a property manager. Be very careful here, this has a bad feel to it in my opinion.
Right on SamW!
Which means, to answer your question,"how hard would it be to buy a apartment complex. . .?"
Probably not hard at all, The seller is willing to finance this outrageous transaction so that you won't have to go to a bank where they will tell you that you are paying at least twice what it it worth.
Unless this is 39K after debt in which case it depends on how much debt there is in front of the 39K. If its all of the 650 k asking price then its a hell of a deal and you should have no problems moving forward.
As always, the devil is in the details.
It really depends on where this thing is.
In North Seattle, for example, those prices are in line with the market. A 6% cap rate isn't that unreasonable around here, at least as a starting point in the negotations. Just looked in the 'sold' section and I'm seeing cap rates of 6.2-6.5%. If you want cap rates closer to 10% you're getting out of the city.
Talk to someone in, say, San Diego, and they think that 6% is an insanely high return.
Given that it's a 16 unit place going for $630k, I'm guessing that it's not in a really hot part of the country, and a 6% cap rate is probably too low.
jamespb,
so probably you go by a cash on cash rate,which is ill founded to say the least!
Ok let me work backwards to illustrate a bit. 39000 NOI. I will probably add 15% in expenses on a very conservative estimate which takes the gross to roughly 45882 add to that 60000 in debt service and the orginal poster needs about 100000 in revenue not to pay out of his pocket. Besides a debt service ratio of atleast 1.25 is required my most lenders if he were to ever refi. They would not go anywhere near this deal. I agree with commercial king! If he is getting 39k after debt service then he has landed a money spinner. Else he needs to run. Period! Location would not worry me much at this point!
I agree with Sam and Commercialking on this one. Unless he is willing to lower the price or has something better to offer you for the price, I would walk away.
I would also add that you should make him an offer of 500K on the way out. And that is a gift, it should be roughly 10 times net (390K) .If he doesnt take it, tell him to not lose your number, and to call you if he hasnt sold it in a couple of months. This way he will be coming to you, and will be willing to negotiate the price some more.
Point is that he is doing something wrong to not have a higher NOI, Like Samw had stated. If you can fix his problem and sell it at his price with an NOI of 65K or better, then you will have a good deal.
By the way, age doesnt matter unless you make an issue of it. If you have the cash and credit, they will not even see your age, race or gender.
For future referance you should also know what his mortgage is if any, and ask for financials. If you come across someone else like this, you will be able to see what he is doing wrong, fix it and sell at a higher price. His NOI of 39K could include his car, mistress, or an accounting error. Look at your deals, as if you were to sell it the day after closing.
Good Luck,
Kyle
senatorcbp2,
Why start with an apartment building other then the seller said they will finance?
Seller financing is pretty common with apartment buildings. If you take the view that there will always be another deal possible, then assume you should focus on your education first. There is a lot to learn about buying, managing and later selling an investment property.
23 is not an issue. Having little to no knowledge is an issue. How about focusing on the education for a few months and then look for a deal?
BTW - Walking through ideas here are fine. I am just concerned that even if you did buy this place you would get killed before you came out the other side. If the deal went really bad you might have a credit scare on your report for 7-10 years.
John
[addsig]
Quote:
On 2004-06-20 21:03, jamespb wrote:
It really depends on where this thing is.
In North Seattle, for example, those prices are in line with the market. A 6% cap rate isn't that unreasonable around here, at least as a starting point in the negotations. Just looked in the 'sold' section and I'm seeing cap rates of 6.2-6.5%. If you want cap rates closer to 10% you're getting out of the city.
Talk to someone in, say, San Diego, and they think that 6% is an insanely high return.
Given that it's a 16 unit place going for $630k, I'm guessing that it's not in a really hot part of the country, and a 6% cap rate is probably too low.
I am reminded of a stock discussion I had a few years back about a tech stock. I believe I was taking the position that there is no stock on the planet that could possibly be worth a p/e ratio of 90. "No, no" I was assured,"It depends on where you buy. If you buy in the technology sector the old rules about p/e ratios don't apply- here a p/e of 70 is considered a good deal and 90 is not outrageous." That was just before the bubble burst.
Now I grant you that a p/e of 70 is not comparable to a 6 cap but the principle is the same-- there are underlying rules of valuation of property and those rules really don't change that much. When you buy property without cash flow in hopes that it will appreciate because everybody else is doing the same thing you have to question what will happen when, one morning everybody wakes up and asks,
"Why should I buy a house here when I can rent one for much less?"
Or,
"'Why should I continue to pay money out month after month for the priveledge of owning real estate? I thought the point was it was supposed to pay me!"
or some one of hundreds of variations of those questions.
Or you can always invest on the greater fool theory: "No matter how much I over-pay some greater fool than me will come along and pay me more. "
Sometimes that theory even works. Sometimes for years. And I suppose that somewhere there is a 90 p/e stock that will pay off someday.
Like it says inthe Bible, "the race is not always to the fleet nor the battle to the strong."
But the smart money always bets that way.
[ Edited by commercialking on Date 06/21/2004 ]
Make sure that the $39K NOI is on the money. Make sure he doesn't mean cash flow. Seeing as how you've never done one of these you may not have any idea if the numbers are right or not. You may want to post some of the other financial information so we can take a look at them.
IF the 39K is a realistic NOI, and that isn't going to change much when you buy it, then I'd keep talking.....but the price would have to reduce dramatically. Run the numbers and figure out what the MOST you would pay for it. You may work backwards and say "what is the most that rents could drop before it went to negative CF" or look at the cash flow per unit or cap rate.
Assuming that the numbers you posted are correct with no prospect of changing them after you buy it....then it's a terrible deal. You've recieved VERY sound advice from the posters above.
First I would like to say thanks for some opinions. Secondly, I mention my age for no other reason than to mention it. I know that it dosent matter what age you are in RE. Also, I am not a complete idiot. I know that 39k is not great but I am going to talk to the owner this week and ask for some financials. Also, couldnt NOI be pretty good if that include PM and property taxes. I mean rent is 700 per unit X 16 X 12months equals 134k. 10% for property management. I thought in property taxes, and a rough estimate for insurance and 39k sounds pretty feasible. With my VAST(jk)knowledge I just told you I know that I might be forgetting something so this is what I need from you guys. Also some of you sound like I already signed a contract or something. I will do everything possible before I buy a property like this. Example get an Attorney, have the Property inspected. Check numbers with a local financial RE guy that I know. I just need the little things that someone like me might forget.
Anyone know of a good way to estimate in insurance cost for residential and commercial properties?
Again if I sound ungrateful, I do not mean to be, but some of post here are not even constructive ideas.
:cry:
BTW. CommercialKing. Might I be able to get your business number and talk over a deal with you sometime. I dont like this slow way of finding out info sometimes.[ Edited by senatorcbp2 on Date 06/21/2004 ]
First of all I am certain that no one here meant to insult your ability to analyze a deal, so please keep in mind that when you ask questions on this board you will get 100% in your face honesty which is exactly what you want, TRUST ME!
That being said, 94K per year in expenses sounds high to me for a 16 unit. I just purchased an 8 unit apartment that has the same NOI and a little more than 1/2 of the gross rent! Get his schedule E from the last two years and see what he's writing off on the rentals. Perhaps he is paying all utilities, etc.... something that you would want to change. Aside from that the rest of the posts here are right-on and I consulted these folks many times before buying my first property.
tmpringle301 couldnt have said it better! The intention is to provide meaningful advice and not to belittle you or question your ability to analyze. You should understand that most of the posters here spend their valuable time in responding to queries and ensuring that SOME of your downsides to the deal are pointed out. You can whine about how the advice came through or be thankful that there are folks who do take their time in helping you. Its your call!
Anyways I appreciate in your face comments so give it to me. Advise me on some of the questions that I was asking and I will listen. CommercialKing says the 10 times NOI is a good investment but is that almost always the case or what? Insurance estimates ( what should I expect to pay roughly)?
TMpringle301, thanks, I was wondering the name of that (schedule E). I was wondering what all I needed to ask him tommorrow when I meet him. Any more little things like that, I sure could use the information.
[ Edited by senatorcbp2 on Date 06/22/2004 ][ Edited by senatorcbp2 on Date 06/22/2004 ]
Hey guys , Thanks for all your help. I went ahead with a partner and bought the property. Thanks