My first Apartment Deal - Is this a good deal?

General Real Estate Investing
1

New the forum, been on here for a month, learning alot from reading the forums, this place rocks, I appreciate all your input and knowledge on this board!

Please let me know what else I need to know, ask to make sure this is a good deal financially for me:

18 Unit Apartment:

List Price : $375,000

General Income: $79,968
Operating Expenses: $21,076 (Gas/Oil, Insurance, Mgmt, Water)
Total True Taxes: $15,000
Net Operating Income = $43,896

Seems as if there is pretty good cash flow

However list price seems, high, I was going to start with $325,000 as an offer

I appreciate any input you all can give me on if this is a good deal to start with and other questions I need to ask

Thanks!

2

I think NOI is lower than that. try around 38k.

3

I was just reading it directly as it was on the MLS report

How did you come up with your NOI number?

Thanks for your help!

Anyone else with thoughts on if this is a good deal or not?

4

Looks like a decent deal. With NOI of $43K assuming a DSCR of 1.2 and an interest rate of 8% the property supports debt of $406K.

5

The rents are very low for a unit that includes utilities. Do you know what each unit rents for? Find out what the MARKET rents are and how many vacancies there are. Then you will know if you can start raising the rent as people move out, or fill the units with renters. I’ll take a property like this on if I knew I could increase the rents or increase occupancy by advertising.

If the rents are maxed out and the vacancies are minimal then you can find deals better then this without much effort.

6

Thanks guys for the advice!

Iron-
Where else do you suggest to find deals similar or better? I hear most of the best deals are not on the MLS when it comes to apartment complexes, any advice?

7

Some people will tell you that there is a magical data base full of half priced commercial properties that only a few Commerecial Realtors have. NOT TRUE!!! There is not a data base or website that houses such a list.

You look on the MLS, Loopnet, go to REI Meetings, use Realtors, low ball, and get your name out there. In the end the only way to get Mid-Lrg apartment buildings to cash flow is by rehabbing them. You need to find apartment buildings that have either high vacancies, extremely low rents, or/and need to be rehabbed. I have only come across a few apartment buildings that would cash flow as is, with no rehab needed.

Find properties that need to be rehabbed. It can be either management rehabbing (vacancies, low rents, etc) or property rehabbing (physical property needs repair).

Do you know the answers in my last post???

8

You look on the MLS, Loopnet, go to REI Meetings, use Realtors, low ball, and get your name out there. In the end the only way to get Mid-Lrg apartment buildings to cash flow is by rehabbing them. You need to find apartment buildings that have either high vacancies, extremely low rents, or/and need to be rehabbed. I have only come across a few apartment buildings that would cash flow as is, with no rehab needed

Iron Range,

This is not true at all. There are way too many variable involved to make a general statement like this. Certainly, if you rehab or reposition a property you will have better NOI and COCR. However there are markets that have reasonable 7-8 caps where you could easily cashflow.

CF is really dependent on alot of factors. How much are you leveraging? What is the loan product/rate? Can you cut expenses? Can you increase operations?

CashCow,

Your best bet is to build a relationship with a quality brokerage firm. You will be in a better position to see listings first and they may even show you some off market deals. It’s what they call pocket listings.
I work with 5 big firms that usually send me everything before it hits loopnet or MLS.

9

Variables meaning facts or what??? Mid-Lrg apartments do not typically cash flow unless there is something wrong. There typically needs to be property rehabbing or management rehabbing needed in order to find a good enough deal worth purchasing.

You will spend a long time looking for a cash flowing mid-lrg commercial apartment with no rehabbing needed and/or no management problems.

10

Variable meaning, how much you are leveraging, what loan product, what market. You can certainly cashflow on apartment buildings if you put more than say 20% down. There are markets that currently list buildings at 8+ caps. You can easily cashflow on an 8 cap.

Like I said, you will certainly cashflow more if you reposition and/or rehab.

Your statement may hold true in some markets. Mine, for instance. Apartments are generally sold around 5-6 caps. You won’t cashflow on something like this unless you put a significant down payment, which isn’t an option for most. You would definitely be better off repositioning and rehabbing in this area. But some markets this strategy is not necessary to cashflow.

11

LIGHTBEING,

Whether you put 0%, 10%, or 50% down is COMPLETELY irrelevant. I can make any property cash flow with enough down, that proves absolutely nothing. Whey you are looking at properties. you ALWAYS cash flow a property at zero down. The money you put down is not free.

12

HUH? How much you leverage a property directly effects the cashflow. Why would you evaluate a property with 0% dp?

When I evaluate a property I typically figure out then NOI and cap rate. Then determine what my COCR is based on how much I expect to leverage and at what anticipated rate.

No wonder you are saying you can’t cashflow on apartment buildings unless you rehab. You are basing it on 0% down. In other words, your formula is using 100% financing??

That is not the proper way to evaluate apartment bldgs.

The money you put down is not free.

I never said it was…

13

Good luck LIGHTBEING. I hope your successful.

14

I’m not quite sure if that was sarcastic but I’m just gonna say, Thanks, you too :smile

Just to clarify to the readers. In order to determine cashflow, or to draw up a cashflow statement you must include your debt service(leverage). This will give you a better understanding of DSCR and your COCR, which is probably the most important factor(how much you are making on your money)

15

I would evaluate a property based on the purchase price, not the purchased price - down pmt. You find the Net Income then subtracted the purchase price’s mortgage. I would not subtract the Net Income by the actual mortgage. To me that doesn’t not represent a true property evaluation. The evaluation of the property is what we are trying to do here.

If you pay cash for a property then how would you know if it is a good deal using your method? That’s why I subtract the net income by the purchase price’s mortgage. This is the way I use to evaluate whether a property is a good deal.

Cap rates and other ratios are used by those who don’t understand what matters. What matters is whether or not the money the property produces is greater then the costs of the property. Money In Vs. Money Out.

16

Iron Range,

I was specifically commenting on your statement regarding cashflow. In order to determine your cashflow you must include your debt service. There is no way around it. Yeah, ofcourse if you pay all cash you obviously don’t have debt service. But that goes without saying. The majority of investors will almost always leverage their properties.

I would not subtract the Net Income by the actual mortgage. To me that doesn’t not represent a true property evaluation. The evaluation of the property is what we are trying to do here.

If you wanted to figure out your cashflow you would. I’m not understanding your position. The bottom line is what we are trying to do here in my opinion. Without including your debt service, how will you know your CF?

Cap rates and other ratios are used by those who don’t understand what matters.

Cap rates will give you a quick glimpse of the deal. If it a true cap rate then you know the NOI, are you saying NOI is not important?

What matters to me is my Cash on Cash Return. I want to know how much return I am making on my money.

What matters is whether or not the money the property produces is greater then the costs of the property. Money In Vs. Money Out.

Wouldn’t the cost of the property include your debt service (money going out?)

Take this for an example:

A 100 unit apartment bldg has a NOI of $180K. Purchase price $2M. true 9% cap rate. Not a bad deal at all. income is obviously higher then expenses. 20k per unit!!! Sweet deal!

However, the property comes with an assumable loan $1.8M @ 8.5% 25 yr am. it requires you to put down 200k plus closing costs etc = $230k total out of pocket.

Now it may look like a sweet deal by evaluating and verifying the income and expenses but is it such a good deal with the debt service???

1.8 M @ 8.5% 25 yr am = 173,928/yr debt service.

your cashflow is a whopping $6072/yr (NOI - Debt service)

And your Cash on Cash return is 2.64% (6072/ your DP 230k)…i can do better then that in a money market savings account.

I think you get my point. Your debt service is a very crucial part of your analysis.

17

Your above stmt is implying that the down pmt is free money. I always include the down pmt in my calculations. So yes, I cash flow assuming 100% financing. I cash flow using 100% of the PURCHASE price. Why?? Because that is the purchase price.

This is where we differ in opinion. I ALWAYS cash flow a property using the purchase price. Whether I am putting 0 down or 100% down is not relevant in determining if the property is a good deal. The relevant part is the purchase price, not the down pmt.

18

I never implied that the down payment is free. I just recognize that a down payment is needed. You seem to be overlooking that step.

You can’t make cashflow calculations without acknowledging the debt service.

Whether I am putting 0 down or 100% down is not relevant in determining if the property is a good deal. The relevant part is the purchase price, not the down pmt.

How is the down payment not relevant? You don’t want to know how much you are making on your money?? Your debt service is very relevant. See my example in previous post. The way you evaluate properties, you would think this was a good deal but by just simply plugging in the debt service you understand that it’s not a good deal.

I’m boggled that you don’t think your debt service is important when evaluating an asset.

19

I can take 1 second and know this is NOT a Sweet deal. So can anyone else that has ever looked at commercial apartments. You can go on loopnet.com and find better deals ALL DAY LONG, and pay full asking price. I would not recommand that, but you could.

A Sweet deal would be around 1.2M or less.

20

Good luck finding a good operating 100 unit complex at a 15 cap !

I can take 1 second and know this is NOT a Sweet deal. So can anyone else that has ever looked at commercial apartments.

Not without me posting the assumable loan info. Your statement is completely false. Infact, Institutional Investors close 7-8 caps all day long. The deal I posted is a 9 cap.

You can go on loopnet.com and find better deals ALL DAY LONG, and pay full asking price. I would not recommand that, but you could.

I have never seen nor do I expect to see a stablized apartment building listed on loopnet for a true 9+ cap. But you will surely find some outrageous pro formas on there.