REO-30 Units in South Dekota Need Help

General Real Estate Investing
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Hi Everyone

I am considering purchasing a 30 unit Section 8 Low Income REO building 22 2+1 and 8 3 + 1 for $320,000. My question for those of you who own apartment complexes is do you thing this is a good deal? especially for a out of state investor, since I am in California and would be giving it to a professional management company to manage and what should I look out for. The building specs are listed below. By the way the 2 bedroom units under section go for $498 and 3 bedrooms for $561. Vacancy presently is at 15%

The building was build in 1978 and bout 40,000-60,000 for upgrades. The Roof is also new. The reason the bank want to get rid of it is that 12 units have been vacant for about 10 months and according to them any new applicants do not get qualified under section 8, which to me sounds crazy, since they have not been listing this building with the local Section 8 as available units and why would any building be forced to only rent section 8 , I know they have a contract expiring soon with section 8 but why they only consider section 8 is vague and will be addressed in due diligence time frame.

Another major consideration is that the previous owner payed for all utilities and converted the building to a master meter even though it can be reverted to individual meters with some cost. Hence the utility bill annually is $40,000 considering the heating is electrical baseboard and nothing in the units is energy efficient. Even with this cost considered the building with cash flow once all units are rented but what would you recommend me doing, keep the utilities hence reducing my vacancy rate since the competition doe not offer all utilities paid by the landlord, changing the heaters to energy efficient heaters to reduce cost or turn the building back slowly to individual meter. You must understand that in the county if tenant fails to pay the utility bill then the landlord is responsible for the full amount.

Any comments would be appreciated.

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Just some random thoughts here coming from someone who owns a smaller apt building.

Don’t necessarily count out baseboard heaters. They’re effective and very cheap to replace. You can get a 72" heater for $66.04 from Lowe’s. Our building uses baseboard heaters.

When I was younger, my aunt lived in a gov’t subsidized complex mostly for people on welfare. I’m not sure if it was called Section 8 at the time or not, but you couldn’t get in there unless you were pretty much dirt poor. I’m only mentioning this because a complex like this may be forced to rent to only Section 8.

Do you know the property taxes and a good estimate of insurance for this?
Do you know the Section 8 utilities allowances vs. the average cost of utilities you’ve listed here?
If you get careless tenants who use tons of electric/water/gas/etc, your utility bills will shoot up.
You bring up an interesting point about the LL being responsible for the utils if the tenant doesn’t pay. I’ve never heard of that one. Sounds “Blue State” to me. I don’t know what it will cost you to convert back to separate utilities, but it seems like a big risk to have the potential of 30 units of tenants wasting YOUR money.

This is a property that is going to have operating expenses over 50% of gross rent.
Monthly gross rent: $15,444
Using 50% for operating expenses, you have: $7722
Now let’s look at the expenses we’ve talked about:
Utilities: $3333.33/mo ($40K/12mo)
Management: $1544/mo (10% of gross rent for man. fee)
Vacancy: $1544/mo (estimate 10% - you listed 15% for
current vacancy - I don’t most people
use that high of a percentage for est.)
Just those expenses alone total:
$6421.33

Subtracting this from our 50% estimate of operating expenses over time only leaves:
$1300.67/mo

That is BEFORE property tax and insurance. On such a big building, I don’t see any way your property tax and insurance will be less than that amount per month. Keep in mind we still haven’t figured in advertising, maint., repairs, legal costs, tenant damage, etc.

But now let’s look at the other part of the equation for your NOI:
Estimated payment for $320K @ 7% for 30yrs is $2128.97
Subtract your monthly debt service from $7722:
$7722 - 2128.97 = $5593.03/mo est. cash flow under the 50% rule.
But we know from figuring up the expenses we have listed so far you are going to be over 50% for operating expenses. Your rent amount compared to the purchase price is OUTSTANDING, however, your expenses are huge too.

What is the difference between your rent and your competition’s rent (places not including utilities)?
Switching those utilities back to separate may reign in your costs and help make the building more profitable. There should be a way to still hold the tenants responsible for the utilities thru the lease. Make it worded to explicitly state they’re responsible for paying the utilities (if you switch it back to separate) or they’re in violation of the lease.

We pay water/sewer/trash on our building. Our water bill averages about $16-22/mo per unit and trash is $32/mo for a dumpster. It would cost at least a few thousand to switch the water, so we don’t sweat that part.

If you do end up keeping utilites all together, there are some things you can do to make things more energy efficient.
Some things we did are:

  1. bought insulation wrap for the water heaters - about $25/heater The electric for the water heaters is wired into the
    common area meter along with our hallway lights.
  2. installed motion sensing light switches in our hallway to turn off the lights about 1 minute after no more motion. It’s not a safety hazard because the lights are on if someone walks in, but they don’t stay on all the time like they did before.
  3. installed energy efficient & long lasting CFL light bulbs in the units where we could. The electric in there is paid by the tenants, but if you’re paying it this could help you. You can buy bulk packs of those lights for not a whole lot of money.
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justin, im not an apartment investor, im into mh’s at the moment, and I like to read threads like this to try and learn something new. However,
I just wanted to compliment you on taking the time and effort to make such an outstanding reply/post. It is people like you who really make a big difference for others who can use a little advice and help. Thanks for making a little bright spot in my day today, take good care, and best of luck in your endeavors. :beer

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Thanks Deuce. I appreciate the kind words. It’s always nice to help out where I can. Best of luck to you as well and have a great weekend!