5-unit apartment building... first time buyer

[KennyPowers]

Hello all, this is my first post on this site and hopefully isnt my last. So here is my situation, I am in my first year out of college and live in the great state of Maine. My long-term goal is to aquire enough solid, long-term, income producing assets that they eventually take up all of my time... I have found a property in one of the bigger cities in Maine (har har) and was looking to get some advice/opinions from any who think they can contribute... so here goes nothing

fully rented, 5 unit apartment building built in 1920. three 2-bedrooms, one 3-bedroom and one 4-bedroom currently rented out for. 475,475,450,550,650 for a total of $2600/month. (personally i believe the rent could increase compared to surrounding rent prices)

Asking price is $69,900
Here are the numbers i have from the year 2010:
Gross Operating Income: 29,640
RE Taxes:1512
Property Insurance:1894
Repairs/maint:927
Fuel:6519 (I updated to current fuel prices)
Water:786
Sewer:774
Elec:504
Dumpster:864
Total OE:13887
NOI:15753

To me this seems like a solid long term investment (it is old and will obviously need repairs but i am very handy and have connections to help me with any big purchases). The reason they are selling is for retirement and thats about all i have on it now

[javipa]

Price    $69,900    

Income                                        % of GSI      
$29,640  GSI                              100.00%
$  1,482  Vacancy Credit Loss        5.00%
$29,158  Gross Effective Income  95.00%

Expenses:      
$  1,512  Taxes                               5.10%
$  1,894  Insurance                         6.39%
$  2,964  Maintenance                   10.00%
$     889  Replacements/Reserves   3.00%
$  2,964  Management                   10.00%
$     786  Water/Sewer                    2.65%
$     504  Electricity                         1.70%
$  6,519  Oil                                  21.99%
$     864  Trash                               2.91%
$18,896  Total Expenses              63.75%
$10,188  Net Operating Income    34.37%
      
CAP RATE  14.5%  [correction from 34%]   
GRM   2.36   

The heating oil seems quite high, but overall this is a great looking deal on paper.

Your cap rate is huge high, and the GRM (Gross Rent Multiplier) screams, "Buy me!"

 

If the numbers checked out and were verifiable (rents, vacancy factor, and expenses) I would definitely want this property.

[davewindsor]

Hello all, this is my first post on this site and hopefully isnt my last. So here is my situation, I am in my first year out of college and live in the great state of Maine. My long-term goal is to aquire enough solid, long-term, income producing assets that they eventually take up all of my time... I have found a property in one of the bigger cities in Maine (har har) and was looking to get some advice/opinions from any who think they can contribute... so here goes nothing

fully rented, 5 unit apartment building built in 1920. three 2-bedrooms, one 3-bedroom and one 4-bedroom currently rented out for. 475,475,450,550,650 for a total of $2600/month. (personally i believe the rent could increase compared to surrounding rent prices)

Asking price is $69,900
Here are the numbers i have from the year 2010:
Gross Operating Income: 29,640
RE Taxes:1512
Property Insurance:1894
Repairs/maint:927
Fuel:6519 (I updated to current fuel prices)
Water:786
Sewer:774
Elec:504
Dumpster:864
Total OE:13887
NOI:15753

To me this seems like a solid long term investment (it is old and will obviously need repairs but i am very handy and have connections to help me with any big purchases). The reason they are selling is for retirement and thats about all i have on it now

On paper, it sounds like an amazing deal.  Which begs the question, why is the owner selling it for so low? 

Just some thoughts to consider.  Is this building completely vacant or rented?  How big are these bedrooms?  I've seen bedrooms that were so small I wondered how they could even fit a single bed and still open the bedroom door.  What is the turnover rate of the tenants?  Did the planning department or fire marshal's office mention any pending violations or work orders?  Are all five apartments legal?  Is the owner willing to show you his last three years of income taxes to verify the income?

If I were you, I also would ask a few local mortgage brokers when was the last time they financed a building in this area, what the rates and LTVs were, and what the banks required.  If the banks aren't even financing in this area, it doesn't even make sense to pursue it further unless you can get a VTB which I doubt if you don't own other property and the owner is advertising some kind of quick sale price.  Stay away from private money unless you own other property and are experienced in this area.  There's a good reason why banks won't touch property in certain areas.

The return does sound a little fishy, but it could be legit.

[justin0419]

I agree w/ Jay and Dave that the numbers do look good.  You'll want to see if there is a lot of deferred maintenance here.  Even if you had to replace quite a bit of stuff including some big ticket items (like roof, HVAC, etc) the numbers would still look good given the rent.  I think that's a great list price for five units.  Definitely worth checking out.  This could be a great start for you.  That's pretty affordable to get into. 

[javipa]

I had to correct the CAP rate.  I divided the NOI by the GSI, instead of the price.  Whoopsie.

[travistane]

Price    $69,900    

Income                                        % of GSI      
$29,640  GSI                              100.00%
$  1,482  Vacancy Credit Loss        5.00%
$29,158  Gross Effective Income  95.00%

Expenses:      
$  1,512  Taxes                               5.10%
$  1,894  Insurance                         6.39%
$  2,964  Maintenance                   10.00%
$     889  Replacements/Reserves   3.00%
$  2,964  Management                   10.00%
$     786  Water/Sewer                    2.65%
$     504  Electricity                         1.70%
$  6,519  Oil                                  21.99%
$     864  Trash                               2.91%
$18,896  Total Expenses              63.75%
$10,188  Net Operating Income    34.37%
      
CAP RATE  14.5%  [correction from 34%]   
GRM   2.36   

The heating oil seems quite high, but overall this is a great looking deal on paper.

Your cap rate is huge high, and the GRM (Gross Rent Multiplier) screams, "Buy me!"

 

If the numbers checked out and were verifiable (rents, vacancy factor, and expenses) I would definitely want this property.

I believe those figures just show that this would be a good catch!

[Leonard Vice]

Thanks. Does this apply to a 4 or 6 unit apartment building too?

[javipa]

Thanks. Does this apply to a 4 or 6 unit apartment building too?

Technically, the same percentages apply to projects this small.

However, the bottom lines on smaller buildings are much more vulnerable to hiccups than larger projects.

I suppose until you get to owning at least 30 units, the 50/50 rule is so vulnerable to hiccups and mistakes that often times the expense on a smaller project can eat up more than 100% of the cash flow in a given year, if not create massive negative cash flow.

I mean one stolen A/C unit and two 30-day vacancies can put the ROI on a four-plex into a tailspin for the year. 

However, on 30-units, you might "need" six stolen A/C units and four chronic vacancies over two months to dent the bottom line.  There's safety in scale.

Hope that helps.

[Leonard Vice]

Thank you very much into clearing that out. I had planned before about this kind of deal, but wasn't really sure on how to continue with it - quite afraid to end up something that I will just regret later on. No one even tried to guided me. Thanks again.

[RayEthell12]

This is really a great deal on paper. You can go for it and buy. Good Luck!

Best Wishes,

[dmonroe45]

I know I'm late and I hope I'm not too late.

This deal appears to good to be true and one thing caught my eye - "FUEL COST".

If there is an undergound fuel tank on the property IT MUST BE REMOVED PRIOR TO RESALE OF THE PROPERTY! - If this tankling is leaking underground it could cost anywhere from $25000 to $125000 depending on how long it's been leaking. Since the home was built in the 20's I would seriously run!

If it's an above ground tank you should be OK as long as its not leaking.

Good Luck

[BTL]

Oil heat in New England is very common. ME winters are pretty cold so the oil costs might be entirely inline with the market.

The long term environmental risks associated with tanks are an issue. Best practice in ME will have clear suggestions for how to deal with an oil tank. I expect them to be in use for a long time still.