Buying an Apartment building in small town

Hi, I come across an 10 units apartment building for sale, it was for sale for the longest time and the agent even took it off public listing. It was listed at $450k, and the gross income currently is $57,000, with potential to increase by $6000 by fill up vacancy and up rent. I offered $350k and I get the sense that the seller is going to accept it.

But I have a rabbit in my stomach, worrying that this is too small of a town. Actually only 1100 in population. What if the town is slowly dying? (negative 1% population increase for the past 10 years, however it won’t die right away.) The value of the property surely won’t go up. But the return is excellent for the price, and the building is solid. what should I do?

Please advise!

If your overall return is higher than your losses on this property than it’s just a matter of accepting the actual returns.

Unless there is something severely wrong with the location, like it’s becoming the destination of uranium disposal, I don’t think the long term risks are very high.

A 1% drop in population over 10 years is statistically nothing. That stat could change on a dime, in a town that size with the arrival of a new liquor store.

What this tells me is that the population is enormously stable, especially considering it’s total population numbers.

It’s clear to me why the property hasn’t been selling.

The CAP Rate is something you find in an appreciating, ‘destination’ location, like Newport Beach, CA, but not some half-horse of a town with a Sinclair station …and surprisingly, a 10-unit apartment building.

Meantime, the current GSI is $57K. The EXPENSES will be 50% of that, or $28.5K. The NOI will be $28.5K.

This means the CAP rate will be 6.3%. What?

I’m betting you can find the same deal at a 10 CAP if you’re willing to look a little further upstream from this over-priced ‘gem.’

That owner is really proud of this project, and you can’t afford to be that proud to own it.

CAP Rate, of course, represents the cash on cash return of an all cash purchase. Does 6.3% excite you?

Meantime, all the rental increases won’t give you a profit. You’ve given your future equity appreciation to the seller.

That is to say, if the current market CAP rate is say 10%, then the value of your newly purchased building with the higher rents is (drum roll, please) $300K. If the CAP was 9%, the value would be $333K.

Just for giggles, let’s say the CAP was 7%, the value would be $428K. That’s after raising the rents.

So, in order to break even, adjusted for inflation, you would need to find a buyer willing to buy at a 6.3% CAP …assuming the higher rents, despite the market CAP rates being 10 or higher.

Somehow the price you’re agreeing to pay here, and it’s consequent return, sucks like a pube-infested shower drain, as far as I’m concerned.

Notwithstanding, and theoretically speaking, you could agree to pay $450,000, and overcome the negative equity, by dividing the price by 360, and offering to make ‘annuity-style’ payments to the seller, for 30 years, at NO interest. This would provide you the extra cash flow, that overcomes the negative equity you purchased.

What you’re about to do:


$450,000 Price
<$ 90,000> Down
$360,000 Balance Financed (6%, 30-year, Due in 7)

$ 30,000 NOI
<$ 25,900> Annual Payment
$ 4,100 Pre-Tax Cash Flow

4.5% Cash On Cash Return

What you might consider doing/offering/negotiating:


$450,000 Price
<$ 90,000> Down
$360,000 Balance Financed (0%, 30-years, Principal Only)
<$ 12,000> Annual Payment

$ 30,000 NOI
<$ 12,000> Annual Principal-Only Payment
$ 18,000 Pre-Tax Cash Flow

20% Cash On Cash Return


This just illustrates the fact that we want our price, or our terms as investors, and we don’t care which we get. The more extreme the price, the more extreme the terms, and visa versa.

Of course, many sellers want their price AND their terms, and we call these sellers “insufficiently motivated,” and move on to more sensible deals.

To put a nose on this, this property is WAY over-priced for it’s location and demand.

You need to find out what is the market cap rate for small, older units in this and nearby half-horse towns.

Finding that out first, will give you the ammo you need to pull the trigger on a deal, where the seller isn’t taking all your profits with him.


Hi Javipa, always love your input.

The CAP rate going here is around 8% at smaller towns, for larger buildings is 7%. So low, I know. For units closer to Toronto you’d be lucky if you can get 5 or 6 CAP rate. For boarding houses the rate is around 12-14%, but bank hates to finance those.

Just to clarify a bit, I would only pay at most $350k for this building. And this is actually a 11-unit building, with 3 of them being commercial. But the office-unit was never occupied, so I didn’t include it in my calculation, and hence I said 10-unit building. The owner just informed me that the rent is now $62000 per year, because the other 2 commercial units has just got new tenants.

so $31k would be expected net, and $350k would be my offering price. Making it a 8.8 CAP return. I am also contemplating on try to assign this deal to investors, because on the financial sheet the expense is showing 40%, because most tenants pay their own utilities. So this would seem really attractive to a lot of other investors. (of course you taught me to use 50% as a rule of thumb)

what do you think?

Edit: Actually, on second thought, if your area gets 10% CAP and sounds like I can find probably even more, why do I waste time here looking for junk. How about I fly to your City for a couple weeks and you help me buy a building?

I missed the part where you were gonna offer $350, and not $450. My bad.

$350,000 Price
<$ 70,000> Down
$280,000 Balance Financed (6%, 30-year, Due in 7)

$ 31,000 NOI
<$ 20,144> Annual Payment
$ 11,856 Pre-Tax Cash Flow

Cash-On-Cash Return: 17.00%
CAP Rate: 08.80%

If the numbers are accurate, this would be a safe deal with a decent return, but not a killer deal.

Killer deals have upsides in rents, in occupancy, in appreciation, in forced appreciation, and inflation. Those are rare, but they come when you look for them.

I can’t find higher CAPs where I’m at. I have to settle on outlying areas, and in other states to find higher CAP deals.

So, you won’t do yourself any favors coming my way.

yup, i know to look harder now.

I also have another one I am going to submit an offer soon. It’s a tricky one, i will bring it up for you to rate my score once I get accepted.

The more deals you look at, the easier it will be to spot hidden opportunities.

That’s why I think it’s wise to analyze the numbers from 100 properties, before you actually start making offers.

After a while, you will begin to recognize patterns and situations that aren’t obvious to amateurs …or even some experienced investors.

If you’re in your wealth building years, and not wealth maintenance, you’re gonna want to force your money to create LOTS of equity out of thin air. As a result, you want to focus on poorly managed units.

These are units where the rents are allowed to become significantly below market; where the manager has over-padded his nest with benefits and perks; vacancies are ignored; maintenance is ignored; the building has become degraded looking; exhibits evidence of an absentee landlord, etc.

Later when you’re in the game for cash flow, and not for appreciation, forced or otherwise, you can find a pretty project to park your money.

as a follow up:

I submitted my offer and they pushed back at 380k. I said I don’t want it at that price.

Finally after the offer expired, the seller asked the agent to tell me “fine i will accept it at 350k”, but i thought yeah this is not the stage where I can park my money, because I have no money to park. I should look for better deals where I can create equity.