Posted by md_chicago on May 12, 2005 at 12:46:49:
Thanks Bob. I’ll take you up on that offer. As far as the seller, I’ll post what happens.
Mel
Evaluating Apartment Buildings - Posted by md_chicago
Posted by md_chicago on May 11, 2005 at 14:57:31:
What are some of the things that you all take into consideration when evaluating an apartment building for buy and hold or rehab and sell. Here are some things I have thought of, but maybe the veterans can add their insight:
Market Value
As-Is Value
Repair/Rehab Costs
Vacancy Rate
Market Rent vs. Rents for Current Leases
Cash Flow
Taxes
Neighborhood Location
Type of heating equipment, whether or not it’s separate
Size of Rooms
Number of Bedrooms/Bathrooms
Finished or Unfinished basement
Able to add legal apartment in basement
Am I missing something? I appreciate your input.
Melanie
Re: Evaluating Apartment Buildings - Posted by Atlanta_bob
Posted by Atlanta_bob on May 11, 2005 at 21:35:19:
Hi Melanie:
Not a seasoned apartment investor, but these puppies are considerably different from single-family houses. Commercial investments are only based on cash flow, debt service coverage ratio (DSCR) and upside potential. Most commercial real estate brokers list apartments at an asking price that is based on “pro-forma” values, not real values. Even if the apartment complex has 30% vacancy rate, they still base their price on 5% vacancy rate. Even if there’s many thousand $$ is deferred maintenance, they base the price as though the place was brand new.
The “unit mix” in an apartment complex is also important. Twenty-four 1BR/1BA units are not very attractive, especially if their physical size is tiny (think: 480SqFt each). But, twelve 2BR/2BA and twelve 3BR/2BA are much more attractive to families who want to rent & live there for a long time. 1BR/1BA units often attract single men or single women who can move at the drop of a hat.
Older apartment complexes often have several utility costs paid by the Owner since each apartment is not metered separately. You can, of course, add separate meters to each unit, but that can be costly (to you, the new owner). Alternately, you can pro-rate those utility costs to each unit rather than raise their rents to “current market rents”.
First, I would focus on the true value of the apartment complex based on actual income & expenses, rather than some “pro-forma” numbers being pushed by the listing agent.
Second, look at the unit mix & location of the property to see if an upside potential exists. There rents might be low, but if the complex is located in an economically challenged part of town, you will be hard-pressed to raise the rents. Best to lower the expenses (i.e.: utility costs).
Lastly, talk to lots of commercial brokers who have properties listed For Sale; ask for their actual expenses; visit some properties. You will get a good sense of what is happening after doing these initial “due diligence” tasks.
Always base your offer on actual financial numbers, not pro-forma.
Hope this helps.
Atlanta_bob
Re: Evaluating Apartment Buildings - Posted by md_chicago
Posted by md_chicago on May 12, 2005 at 08:53:16:
Thanks Atlanta_bob. As apart of my J-O-B, I travel to Atlanta for a week in mid-September. If I’m still here then, maybe we can do lunch. I greatly appreciate your feedback.
I have this spreadsheet that calculates mortgage, interest, taxes and insurance costs, maintenance costs, vacancy rates and advertising costs compared to rents. I’ve found it to be very helpful. The building was built in 1945, so it has a boiler providing radiant heat for the whole buidling. The top floor is a 3br 1 bath and the first floor is a 2br 1 bath. The 3br can probably rent from 1000-1200 per month, and the 2 bedroom 800-900 per month. I haven’t seen the inside yet, but that is just from the advertising I saw in the paper for that area. Seller is asking 165K. This is what I talked her down on the phone from 190K. I’m trying to get in at 135-145k. Comps are 190K in rehabbed condition.
Also, I just found out through the my daily law bulletin that the owner filed bankruptcy. I don’t know yet if she filed 7 or 13, but I guess I’ll find out tomorrow. I know I wouldn’t be able to do anything unless the building is released from the bankruptcy. So this is going to be interesting. I’ll keep everyone posted.
Re: Evaluating Apartment Buildings - Posted by Atlanta_bob
Posted by Atlanta_bob on May 12, 2005 at 11:54:05:
Hi md_chicago:
Give me a call anytime you’re in town: 678-445-5544. Lunch works for me.
Sounds like this 1945 building is a duplex (??) with only two units?? If you can get $2K/month in rent, your $165K price is pretty good. As you problably know, if the building is a duplex, you can get a standard “residential” loan, rather than a commercial loan (up to 4 units). Terms are much better, especially the (lower) down payment requirements.
Your spreadsheet is vital to evaluating any apartment complex, although a duplex can be done “in your head”. Best to focus on monthly cash flow, debt service coverage ratio, and cash-on-cash return. If those numbers work for this building, then you have a winner!
Hope this helps.
Atlanta_bob