I have been looking for an apartment complex. I will tell you my journey. I found that the competition of syndicates are looking for $1.5million and up (at $40,000/door 30 or so doors). Complex of that size can afford a manager and they don’t want to go much smaller than that. So I wanted to go smaller but 10 to 15 units is too small to mess with and single buyers can afford it. But there is a sweet spot around 30 units without as much competition. Too small for the syndicates and too large for single buyers to pull down. So I will buy two 30 units.

I found one in a close town that is 23 units. They wanted $850k and it was made up of 8 made of 4 up and 4 down 2 bedroom apartments with 4 duplexes across the parking lot and a single family house at the end of the parking lot. It had a laundry on site and looked very nice. Updated 2 years ago (granite counters and tile floors). I was really excited about the fact that people prefer single family next duplexes and last apartments. So I could charge higher rents for the duplexes and house.

Nice. I’ll keep an eye out for what you’re looking for in this area.

Ok. We looked at the financials and inspections. Pretty nice complex. All of the units have been rehabbed already. They have granite tile and painting inside and out. Fully occupied at market rents. The total income is $141,000 and expenses is $83,000 for a net operation income of $58.000. Given an 8% cap rate means the property is valued at $725,000.

So I looked for value add opportunities. The rents are at market rates, the expenses are actually pretty good at $3,600 which includes a manager. So if I manage it myself it takes the NOI up to $70,000 and at an 8% cap rate it now appraises for $875,000. Next I looked at the clientele. They are the bottom of the bottom. They are all one flat tire away from total financial ruin. They are going to be calling the manager every day wanting this or that and I have to ask where’s the value? I can cash flow it but what about forced appreciation? I can’t go up on rent and the expenses are as low as I dare. I can do some things to improve the property but those will increase expenses. This is a no deal for me. I’m back on the market.

Well done. Good due diligence and financial analysis always lead to the RIGHT decision.

I have been debating with myself whether to give my thoughts on this, but on the face of it, this may not be such a bad deal for you to reconsider.

First, what’s your interest rate? You make no mention of that. If this were Toronto, you could get a 5 year mortgage insured rate for around 2%. But, if it’s a 300+ kms from Toronto, the mortgage insured rate is around 4-6%. If your area is 2%, you make 6%. That’s not bad. If you could convince the vendor to give you 2% instead, why not?

The second interesting play here is the type of units (it’s a bundle of smaller buildings). Usually, the parts are worth a lot more than the whole. You said they are all updated with granite countertops. Couldn’t you start evicting people a building at a time and severing the parcels and selling the buildings off individually as non-rentals? If you buy the package at $37K a door, are you telling me you can’t sell a repainted single house with granite countertops for $80K? How about selling the duplexes as vacant single family homes at $160K a piece? And on the remaining 8-plex, do a condo conversion and sell the units off individually (updated units with granite countertops are ripe for a condo conversion). And if there’s a lot of extra land, you can sever and sell that off individually too.

8% cap or $37K a door doesn’t sound bad for updated units with granite countertops and all tiled floors. Granite isn’t cheap. A couple good friends in my city are general contractors and I know what they charge and they are BUSY. Your eyes would pop if you saw some of their invoices. You should ask one of the general contractors on this site what they would charge for all this updating with granite countertops if you were a REIT getting an estimate.

I don’t know if you’ll do a lot better than 8% cap unless you’re willing to put a lot of sweat equity into a property or move to some far out, depressed city. Getting crap tenants is normal. If the tenants were great, they wouldn’t be selling the property. Let me think. When is the last time I bought a rental property that didn’t have a lot of “bottom of the bottom” tenants in it? Um. NEVER. You lay down the law to get them out and usually many of the them move elsewhere on their own and you may have to go through the whole process of evicting the remainder or negotiating, but that’s normal.

As for appreciation, why wouldn’t people pay a premium for updated units with granite countertops? Try to get more rents one unit at a time. When one unit is vacant, try higher rents. You’re still collecting an income from the other 22 units.

As another point on appreciation. In three years, the property values have more than doubled in my city (with former oil workers returning from the depressed oil fields in the mid-west with buckets of cash). I can’t find deals in my city anymore that I could 3 years ago. My buildings have tripled in value. Just small wartime houses in my market that went for $75K a few years ago are listing for $150K today with 20-30 offers within the first week with 20% over asking price and no conditions whatsoever (no home inspection conditions, no financing conditions, nothing–they are hoarding them as is). The point being: Don’t be left out before the real estate prices skyrocket.

How long have you been looking for an apartment building? You’ve been on this site since the beginning, right? This doesn’t sound like the worst of the bunch. It sounds pretty good, actually. It doesn’t sound like you’re going to find something better unless you’re prepared to move to a city that’s several hundred kms from the city you’re living in now. Maybe I don’t have all the information as a lot of details were missing from your post, but on the face of it, it sounds like something worth reconsidering.

OK I think I found it. It is 22 units with an NOI of $43,077 at a 8% cap rate the value is $538,000. The owner wants to sell it to me for $800,000. I’m buying that one and this is why. The tenants have been there for up to 20 years. The buildings and grounds have been exceptionally well maintained but the rents have never been raised. After each tenant moved in they paid $350/month for the 1 bedrooms and $500/month for 2 bedrooms rent 20 years ago and their rent never was raised. The market rents are $800 for 2 bedrooms and $650 for 1 bedroom apartments. If I bring the rents to market rates and keep the expenses the same the new NOI is $109,600 which at an 8% cap rate gives it a new value of $1,300,000. That is a half a million dollars just sitting there for the taking. Old folks call it a bird’s nest on the ground.

Congrats! Sounds like a good deal!

best of luck to you in your search