Okay, I’m here to ask Mike a question.
I have found a 248 unit apartment complex.
The asking price is 6.6 mil. According to your formula, if I’ve done it right, I should offer no more than 4,960,000.
Did I figure that right?
Do you ever make an exception?
I’m asking because this complex is actually down the road from me.
Great suburbs, medien income in a 3 mi. radius of the complex is 74,000.per hh.
The complex needs some upgrading, exterior paint, etc. Appears to be mostly cosmetic although I need to investigate further. The seller is willing to finance although I need more details (waiting for his e-mail).
I talked to the police (I got pulled over while at the complex) they said no area in our area is bad but the complex has gone a little down hill and needs cosmetic help.
My big question if I can get financing for 6-7% from the owner wouldn’t it be acceptable to pay him 5.9 mil. My payment would still be smaller than if I paid him 4.9 mil at 10% (bank commercial financing)?
Just looking for feedback.
Okay, I’m here to ask Mike a question.
Wow, that is a big project. I have not done a project even close to that big. However, regardless of the size, you must have a positive cash flow. That is even more important with a big project like this one. If you make a mistake even by a small percentage on this size project, you’ll be broke in no time!
You ommitted the most important detail - the gross rents. To me, everything depends on the numbers. The very first thing I would do is subtract the mortgage payment (P & I) from 1/2 of the gross rents. That will give you the cash flow. Divide that by 248 to get your cash flow per unit.
From a cash flow standpoint, you could pay more for a property if it has a lower interest rate. The problem with paying a higher price is that the property will be more difficult to sell if you need to get out of the deal. Buying at a discount gives you equity AND the ability to get out of the deal safely.
Danny(theGREAT) might have some properties that big and may be able to offer some advice. Just remember, whether you’re buying a 1br single family house or a 100 story office building, CASH FLOW IS KING!
Post the numbers, I’d love to see them.
Thanks for youe quick response, I’m awaiting the numbers too and as soon as I get them you can be sure I’ll post for advice.
I have tried to come up with basic no.'s based on experience. ie. the tax rate is same as my home so I figured about what they might be, ins. based on my units elswhere as I did w/ garbage removal.
Here are my tentative no’s.
1 bed 1 bath 748’ 72 units at 450.00 per month
2 bed 1.5 bath 984’ 80 units at 550.00 per month
2 bed 1.5 bath townhouse 110 at 650.00 per month
3 bed 1.5 bath townhouse 22 unit 700.00 per month
total income 163,300. I subtracted 25% for vacancy rate. I wanted to be very conservative. I drove through and there seem to be alot of cars but two buildings seem to need more work and I think they are empty. That leaves me with 122,500.-garbage 1,500.-taxes 15,000. -ins 7,000.-repairs 10,000.- management 12,000 (me)-payment 60,000.00 ( based on the worst case senario, 6 mil at 10% for 20 years) leaving me with 17,000.
Now, I know how fast 17,000. can turn into 17.00 lol
so of course I have to verify my numbers with owner. Mine are speculation. But I think I was ultra conservative so it looks pretty good.
Going by your method I would take my mortgage payment from half the gross rents( Iwill use my no. post vacancy rates to be safe) 122,500.00- mortgage payment 60,000 or 62,500. divide by 248 leaving me 250.00 per unit. but what about - the other bills?
Thanks for clarifying
I went back and figured it with the 17,000.00 left over and it left me with 68.00 per unit–all expenses paid.
If I add back in management fees it would be a little over 100.
This sounds good for such a big undertaking but like you said, one mistake and wow. Also I wouldn’t anticipate the maintenance to be 10,000. after the first year, maybe more like 5,000-8,000.
I think you made a math error. You subtract the mortgage payment from 1/2 of the gross rents, because operating expenses are typically 50% of gross rents. It looks to me like you subtracted the mortgage payment from the gross rents (not 1/2 of the gross rents).
So, let’s use your numbers:
Gross Rents: $163,300
Less Operating Expenses (50%) $ 81,650
= NOI $ 81,650
Cash flow = NOI - Mortgage
Cash flow = $81,650 - 60,000 = $21,650 per month positive cash flow
Divide that by 248 = $87 per month positive cash flow per unit (not $250)
This is with the gross rents of $163,300
If you had gross rents of only $122,500 while you’re working on the vacant buildings, then you’re in real trouble unless you’ve got a big pile of money. If you borrow the money to carry the building and for the rehab costs, you need to add that debt to your mortgage debt to consider your cash flow.
Okay so you assume that 50% of gross covers all expenses. Which it should and then some and like I said I would rather be overly cautious. I guess you don’t figure vacancy rate as part of the operating expenses? If not then 25% vacancy would bring gross reciepts to 122,000-50% or 61,000 leaving me with 61,000. for a 60,000 +or- mortgage payment. ouch!!
Okay but I do have the management fee, thats also assuming 10% financing, and I would hope vacancy wouldn’t be as high as 25%.
Now it’s time to get his schedule e and find out more from the seller.
I’m still excited but cautious. I can’t afford a mi$take.
I am going to call the city Tues. and find out when it sold last and for how much, this will give me an idea of how much wiggle room the seller has.
Thanks for your help and wish me luck!
The 50% figure should include vacancies and all other expenses. The biggest problem I see is the money needed for the rehab and the vacancy/loss of rent during the rehab. I think you’re on the right track. However, extreme caution is warranted.
In addition to looking up the last sale price, I would look on the county’s recorder’s website and see what you can find under the owner’s name.
Do I remember correctly that in one of your previous postings you mentioned that the %50 gross income cost figure could be reduced to ~%30 if there are no management companies invovled (seems like there were other reductions as well…)?
The 50% number includes all expenses. If you do the management, that’s usually about 10%. Maintenance is another 5-10%. I would always err on the conservative side.