My wife found a 21 unit apartment building for $699,000 and here are the important numbers
Asking price $699,000.00,
Rent roll: $120,594.00
Vacancy rate: 10%
Net rent roll $108,534.00
Owner expense sheet from 2006
Total expense are -$27,072.05 (water, insurance, electric, gas, cable,property taxes)
Sub total $81461.95
Management fee: 10% 10,853.00 ( I used net rent roll as a multiple)
Total expenses are $37,925.05
Net Operating income $70,608.95
We would like to offer the seller $600K and have him hold $200k seller finance
We would have a 1st mortgage of 400K from bank @ 9.0% debt service 40,281 per yr
2nd mortgage from seller at 200K @ 6% debt service 15,463.23 per yr
total debt service is $55,744.23 per yr
yearly cash flow 14864.72
monthly cash flow $1238.72
Do these number seem possible? If the seller does not like our offer price and we pay 650k or higher the number do not work. We do know that the seller paid 375K in 2004 for the building. Is it normal for the management company to take their fee from the gross rents or the net rents? Owner pays for all the expenses expenses.
Is this your first deal or do you have some experience? What are your experiences? If this is the first, I would suggest trying something smaller first to learn some of the ropes and problems of landlording and running rental properties, unless you have very substantial assets behind you to absorb a loss if you make a mistake in the deal. You are playing with big numbers if you are a beginner.
I will say that the numbers seem possible, however, I have yet to look at a similar deal where the numbers that were presented me by the seller were close to the actual numbers once I had the lease agreements in hand and copies of the last years actual bills and so forth. Verify everything and then dig a little deeper.
We are currently taking a commercial real estate class. We have had some residential rentals for over 5 years and also short term rentals for 2 plus years. We are new to the commercial world. The main question is do we pay all that money to the management company from the net or gross rent roll. We still have to do some more research of the real number about this property. My wife do some more research to get the real numbers.
Sorry for taking you for a newbie, first post and all. I think the question about the management company can only be answered by the current management company or one that you would think of hiring. Most are different and that always leaves room for negotiating. I would think at 10%, that should be a net number, not taking into account vacancies. This also gives them a little incentive to keep the units full. call around the area.
From the numbers you provided, it obviously works. The management company should be taking their fee from rents collected. They should also be able to help you determine the expenses on this property. In my experience, sellers usually list the accurate income but they love to fudge the expenses. To me, the expenses seem extremely low. I guess it really depends on the area. Your mamanagemet company should be able to tell you if those are close to accurate.
I’m dealing with bigger multi-family properties and the expenses per unit are in the area of $3000-4000/unit. Your seller is showing 1805/unit. Like I said, it is dependent on your area. Check with you property management company. Ask them if they have a copy of REIT magazine. It has tons of information on multifamily properties and is specific to areas and submarkets.
I noticed there was no maintenence or reserve expenses in his numbers. Also, it’s typical that insurance and taxes will go up, so you must account for this in your evaluation.
If the numbers are accurate and you can get this from the seller on those terms, this is a SLAM DUNK deal. Don’t even think twice. I’d be all over this like a hungry cockroach.
Not to be a dream killer, but this is what “skeptics” might say:
you’re overleveraged (100% CLTV)
you’re asking the seller to take on the risk of having his equity wiped out even if he agrees to 2nd seller carry (and you’ve never done this before… though I do think running multi-unit apartment is a no-brainer unless you get REAL greedy)
considering #2, why would the seller give you a 100k discount? this is unlikely
But hey… maybe you got some real persuasive personality. Who knows?
keep us updated… would love to find out what happens next