I am currently reviewing a 8-units apartment - all 2 bedrooms in Columbus, OH
asking $230K (28K/unit)
average rents: 480 (3 vacants in fall).
the seller doesn’t provide sch. E. but provide income / expenses from the management company. Is this acceptable?
2005 net income was only 9K, 2006 net income 7K. 2007 YTD is -2K (loss). Based on the data, the expense is very high, average 30k/year. Owner pays gas & water. Average gas bill 7K/year. Very high.
The expenses are high. Owner replaced appliances and did a lot of repairs, maybe if I switch to separate metering (tenant pays) and change the heating system with newer/more efficient, I might reduce its expenses.
Do you think it’s worth pursuing? Say, if it has a normal amount of expenses, do you think the price is good? What makes their expenses high? I was thinking if there’s a possible way to reduce expense, therefore, increase NOI.
Also, the area is a muslim comunity, do you think it will shy away other future tenants?
Please advice. Thanks. E"
The typical expenses for the area I invest in are around $3500/unit/yr.
However, expenses seem a bit high for Ohio. $3750/unit/yr or $312/mth. There may be ways to capitalize on this.
Changing out heating systems and seperating utilities can be very costly and in some cases not worth the effort. Sure, it will lower you expenses but you need to calculate how much it is going to cost and build that into your cashflow analysis and realize your overall return.
Are you familiar with Columbus? I recall that city being very dangerous.
What does the Net Income represent? Is it the Net operating Income? The net income from rents? or the cashflow? Is the debt service included in the Net income? Alot of owners/management companies represent these in different ways.
If the community caters to a certain demographics that can be a good or a bad thing depending on the area population and projected future population.
The net income represents. All income (including laundry) and All expenses (utilitilities, repairs, cleaning, tax, insurances, lawn, plumbing, roof/gutter, yard work, etc.). However, it doesn’t include the management fee.
In 2006, they had 2 units vacant, using your estimate $3750/unit/yr, should bring expense about 22,500/year (3750*6). Therefore, 30K/year is high. It’s about 80.7% of income!!
I guess expense is high and it hasn’t reached full occupancy, that’s why the numbers looked bad.
How much would you be willing to purchase for this type of property, Including cost of rehab to make it more attractive and lower the expense?
OK, so you are telling me that the Net Operating income is as follows:
2005 - 9,000
2006 - 7,000
2007 - (2000)
Pretty terrible numbers considering you haven’t factored in the debt.
Here’s a quick proforma on what I see based on 1 unit vacant (12.5%). I’m really not sure what the typical expenses are in Columbus but I will use $3250/unit. Please verify with property management companies or research companies.
Gross rents 46080 (based on $480/mth)
less vacancies 5760
Effective GI 40320
Cap rate is 6.22% based off the 230k asking price.
20% down payment = $46,000
184,000 @ 7.5% 30 yr am = $15,444 debt service
Cashflow = (1124)/yr
you’ll be losing almost $100/per month
I don’t know the area but I think you can get units for alot cheaper in Columbus. Let’s see what this looks like at $20,000/unit
20% dp 32000
128000 @ 7.5% 30 yr am = 10740/yr debt service
COCR = 11.18%
Not bad, if there is some value added opportunity and projected growth in this area (i.e. rental rates, jobs, population etc). Then it may be something to look into further.
Here is how I see this deal:
Gross Rents: $3,840 per month
Operating Expenses: $1,920 per month
NOI: $1,920 per month
Mortgage: ($230K, 20 yr, 8%): $1,923 per month
Monthly LOSS: $3
This is a terrible deal. I wouldn’t buy it unless it had $800 per month positive cash flow, which you CAN find in or near Columbus.