Please evaluate this deal - URGENT

Dear REI investors,

I and my investor friends are considering putting offer on this 30 unit apartment building in IL. It was built in 1978, 28 -2B 1Bath and 2 One bed one bath.

Gross effective Income $162,500 (assuming 10% vacancy rate) . Current rents are 510 (2bed) and 470 (1bed)

Total expenses = $136000 (including mortgage and property management) based on 2009 Income statement.

Property listed for $1.5M, seller ready to sell for $1M

It is a 33 year old building. Based on the numbers the Cap rate is 7.63 and the cash-on-cash return is 16.58%.

Is it a good deal to but at $1.0M ? or are we missing anything here ?

Could someone please respond.
Also I want to know what are the contingencies to put in the contract?

If it needs lot of updating the do we include that in offer price or the offer is purely based on the income potential?

Similar apartments are renting for $640 in the neighborhood.

I really appreciate your quick responses.


  1. Make the offer on what the property is doing ‘today’, not what it might do in the future after a rehab. If the property could do better, the seller would be doing it already. Of course that’s a negotiating position.

  2. Maybe the seller is actually incompetent at bringing the property to its full operating temperature…?

  3. Assuming a 10% vacancy factor tells me one of, or all, the following things is true:

a. The asking rents are too high.
b. The management/owner is incompetent.
c. The demand for similar housing is moving in the wrong direction (for any number of reasons including demographic shifts and/or the local economy, etc.).

Regardless, maintaining a 95% occupancy always reflects the optimum level of profitability, and may require significant adjustment of asking rents in order to draw enough customers to maintain a 95% occupancy factor (5% vacancy factor).

I’ve faced No. “c” myself. Instead of lowering rents and giving away TV’s and toasters, I marketed to the credit challenged who wanted what I offered, and were willing to jump my rent/deposit/term hurdles to get it. This isn’t an approach I suggest for anyone, but the experienced.

Your expense/mortgage figure is confusing. You have ‘expenses’ and you have ‘debt service’, not debt-service-expense. That’s a dysfunctional way to evaluate numbers.

Frankly, it’s one thing to weigh on an an analysis, but quite another to have to define terms…

I’m concerned that you don’t have enough basic knowledge to even understand my feedback. Understanding financial analysis is 110% of the negotiating process. At this point, it looks like you’re negotiating with one arm tied behind your back, and the other arm is broken.

BTW, just to add insult to injury, starting off an analysis with the ‘effective income’ is a non-starter. In your case, the ‘effective income’ is the actual income. I have no idea if the 10% vacancy and credit loss is real or assumed.

Always start with the Gross Scheduled Income and work down from there. Then separate your expenses from debt service, from vacancy and credit loss.

You should see:

  2. Plus MISC. INCOME (laundry, vending machines)
  3. Less VACANCY and Credit Loss

NOTE: I never see “misc income” put directly under the GSI. Why? Because it’s a way to make it seem that the misc. income is not effected by the vacancy when studying a pro forma. Of course the misc. income is negatively effected by a drop in occupancy! The higher the vacancy factor, the less customers there are to wash clothes, buy soap, candy bars and pop.

  1. Less EXPENSES (EXP)
  2. =NET OPERATING INCOME (NOI) [Cash flow before debt service]
  4. =CASH FLOW (CF)

Banks assume 5% Vacancy and Credit Loss regardless of what’s happening, and if it’s actually 10%, that’s a terrible angle to show the bank. Worse, you could end up with a higher interest rate and significantly shorter terms.

Meantime, I have enough analysis experience that I could reverse engineer your data to come to some reliable conclusions, but frankly it wouldn’t help, because I don’t know your market conditions to make an overall judgment as to the wisdom of this purchase, or not. For all I know, the market is what you say it is, but it’s going down like an elevator with a broken cable.

I’ve always recommend doing analysis on 100 data sheets, that include real numbers, along with their respective pro forma(s), before negotiating the first offer. Anyone who spends this time will be able to quickly recognize trends, hidden profits centers, and upsides in deals that only the more sophisticated investors would appreciate. After that, negotiations get much more persuasive, elegant and profitable, if not efficient.



Thanks for your response. You reminded me of my math teacher who gives me answers after boxing my ears… haha… Thanks for all the detailed explanation.

I am in a hurry to get answers and missed some info in my post. I started with Gross income and then assumed a 10% vacation rate to get the Effective Gross Income. Is it not normal to assume 10% vacancy?

I don’t see why my expense/mortgage is confusing. My total expenses is $136000, which includes everything. So my cah flow is 162500-136000=$26500. The only thing I didn’t understand in your feedback is the credit loss?

The seller has several properties and seems to be in a financial crisis and looking to dump this property. Considering the neighboring apartment rents of $640 and feedback from the tenants of the apartments as not well maintained, I placed an offer of 900K, will keep you posted on the response. Thanks again for the quick response and the tool.

Have a good evening.


I like your chutzpah! “Darn the details…!”

Did you get my pm with the real estate analysis sheet?

Here’s why you don’t combine numbers…

But first, let me say, if the area vacancy factor is 10%, then we can safely assume that we’ll experience the same thing, all things being equal… That said ‘nothing’ is equal. Our building is either better or worse than the competition. It’s not exactly the same (or shouldn’t be).

If the area vacancy factor was hovering at 10%, then, by gawd, we’re gonna lower our rents to fill the building to a consistent 95% occupancy rate. Why?

Because leaving 5% on the table, also means a 5% drop in misc. income, and an actual loss in revenue. 5% may not seem like much, and probably isn’t for a four plex, but for 30 units renting at$640/mo with a 10% vacancy means we’re losing 3 unit’s worth of rent every month, or 3 times $640, or $1920/mo in lost revenue, or an annual revenue loss of 23,000/yr of a potential GSI of $230,400/yr.

That’s a big loss. That means we’re ‘netting’ about $207,400 after a 10% vacancy and credit loss.

However, for example, what happens if we find that lowering the rents by $30/unit to an annual GSI of $219,600, we also reduce our vacancy and credit loss to $10,080 or 5% of the GSI? That means we ‘net’ about $208,800 after vacancy and credit losses.

That’s an overall revenue increase of $2,120 for the year, just BY LOWERING THE RENTS to achieve a 5% vacancy/credit loss.

Wouldn’t that ‘extra’ revenue pay for generous tips at the Claim Jumper?

So, assuming a 10% or greater vacancy and credit loss just means there’s a significant amount of money being left on the table.

Back to combining numbers…

Our baseline assumption is that the total overhead of a project, including vacancy and credit losses is 50% of the GSI (not including debt service). This is a safe assumption, even though we may ‘effectively’ operate the building more inexpensively once we own it.

We need ‘one’ operating assumption, so that when we compare apples to apples, the differences really become obvious and easy to recognize. Two, 30-year old buildings with the same structure and configuration are really easy to compare and contrast, especially if we apply the same assumptions to each analysis.

Same goes for each property type, sorted by age, construction, price point, etc.

There was a big discussion here about operating expense assumptions, and I’m not digging that up again, suffice to say that starting at 50% overhead is a good, safe assumption at the get-go for any property we analyze (unless it’s a 100-year old, brick ‘job’ in downtown KCMO, or something built 10 years ago).

The reason I don’t like your presentation of data is that I can’t actually analyze the details.

For example… short-cutting to the bottom line by combining expenses and debt service, doesn’t allow me to easily assess if the expenses are too high, too low, or just right for the size, age, and configuration of the project. An old building with common utilities might have expenses that run 50% of the GSI, not including vacancy and credit losses, or management…

[ Also, I have to assume the numbers are correct. ]

A newer walk-up style building with separately metered utilities and no common areas might have expenses as low as 25% of the GSI not including vacancy and management overhead. That’s a big difference.

Same thing with the debt service. I don’t know if the financing is good, bad, or indifferent when they’re combined into one number.

Hope that answers your questions…


Yes, I did receive the analysis sheet. Thank you for the answers. Have a good day.