Please help me determine the purchase price on this apartment bldg

General Real Estate Investing
1

This is a 36 unit (2Bed 2Bath) 1995 building listed for $1.675M. NOI is $138300 (This is Proforma) and a cap rate of 8.26% mentioned on the listing.

my analysis says 138300/.0826=$1.6743M. So I thought they listed at reasonable price.

Now the mortgage for 80% purchase price at a 5% 5 yr arm and 20 yr amoritization is $8450/month = $101,400

Cash flow = 138300-101400=$36900
Cash on cash return = 36900/320000=11.53% (a fairly decent double digit right)

Here is the catch. I got a hold of the rent rolls and expense report for 2011 Year to date through october and also for 2010.

2011 NUMBERS
Total income = 230151 (10 months) = 276181 (12 months prorated)
Total Operating Expenses = 129057 (10 mon) = 154868 (12 mon prorated)
Net Income = $121312
New purchase price based on these numbers = 121312/.0826=$1.468M
Debt Service = 7747X12=$92964
Cash Flow = $28,348
Cash on Cash return = 28348/293600=9.65% (single digit kinda sucks)
Here it fits the 50/50 rule 129057/276181=46.7% expenses out of which 45000 is repairs and 5645 is carpet/vinyl replacement costs.

2010 NUMBERS
Total income = 220554 (10 months) = 264664 (12 months prorated)
Total Operating Expenses = 174872 (10 mon) = 209846 (12 mon prorated)
Net Income = $54817.6
New purchase price based on these numbers = 54817.6/.0826=$663,651
Debt Service = 3500X12=$42000
Cash Flow = $12817
Cash on Cash return = 12817/132729=9.65% (single digit kinda sucks)
Here is where I am scratching my head it doesn’t fit the 50/50 rule 209846/264664=79.3% expenses out of which 74200 is repairs & maint and 25745 is carpet/vinyl replacement costs.

I understand that they did some repairs in 2010 and the cashflow is low. But the total income didn’t change by more than 10,000 per year so is this a property that sucks up heavy repairs every year or how do I figure out the best purchase price which would be a win win for both seller and myself. I am not saying that 663K is a purchase price based on 2010 numbers but at the same time is the $1.468M worth based on 2011 numbers. This is a 16 year old building. By the way the tenants are all white collar job tenants with rents ranging from 675 to 715. Pretty good neighborhood.

How would I forecast the repairs for future and come up with a good purchase price? I know I got to do inspection that tells more on how much repairs I might see. But to get the ball rolling on negotiations what is the best purchase price to get the seller agree at the same time should work for me.

Please help me determine a good purchase price for this property considering the markets conditions and properties potential. Also let me know if you need more information from me. Sorry for the long post and thanks in advance for reading and posting. :banghead

Regards
Pawan

2

Hi,

No need to bang your head against the wall as it takes time to learn, keep trying and learning and you will get it!

This property requires forensic analysis as you have to reconstruct the income / expense and net operating income!

Remember to adjust gross income for your markets vacancy factor!

Take an excel spread sheet and put the actual numbers supplied to you as you understand them, project the 50 / 50 rule in the next column and then in the third column show the actual or projected financials (Estimated).

Then take and show your cap rate and value (Price) all three ways!

Then show all repairs outside of general maintence, replacement reserve and major repair reserve (These three item’s should be part of your 50 / 50.

The outside repairs are cost’s being incurred because of age, these types of repairs need to be factored into a 1 to 5 year financial plan and then re-adjust FMV accordingly!

They are asking $46.5k per unit, your number will probable be below $39k per unit and above $30k per unit but run your numbers! When you figure out that 1 to 5 year requirement for repairs outside of general operating standards under 50 / 50, you will know what this number is? Repairs could be $1k per unit or repairs could be $9k per unit thus the $9k difference in my theoretical projections!

It looks like there sticking $2.5k per unit in additional repairs in 2010 and about $1k per unit in additional repairs in 2011!

             GR
3

Gold River,

Thank you very much , I will do the calcs and will repost here. Have a good day.

Regards
Pawan