Can I get some feedback on underwriting a 60 unit apartment deal
The owners asking $2.4M for 64 units. About 70% of the units are 2bd 1.5 bath and 30% are 2 bd 1 bath. Working class apartment, unit rents on average range from $475-$500. I believe tenants are paying all utilities and I think the building is sub-metered but I need to speak with the owner again to make sure.
Property built in 1990, wood siding, sheetrock interior walls
The gross monthly revenue averages out to around 28k. The owner estimates from his rent roll that if every unit was rented and paid he could get $30,045.
Where I'm caught off guard is that his monthly expenditures seem incredibly high for this size of a deal. He sent me about six months worth of basically word documents detailing the expenditures and rent roll for this deal, however the months are spread out and not in a row.
On average he's showing around 25-28k in expenditures per month, but this also includes the draws he's taking from the property. Don't think he hires out an onsite manager but oversees the day to day repairs/ and leasing from time to time.
Expenses
Feb 2017 Expenses
Bank Note-$11,000 Laundry room-$195 AT&T-$118 Owner's Compensation- $3875 (I believe he might be the onsite manager day to day) Credit card- $750 Discover card-$500 County Tax Comm- $3000 Insurance-$1178 HVAC- $1315 Home Depot-$750 CPA-$750 Grass cut-$300 Ace hardware- $210 Carpet clean- $80 Maintenance guy-$1500 (repairs) Roofing material -$1600 City -$1251 (utilities)
This gives a general overview of the kind of expenses he's showing month to month with other line items popping up here and there.
This deal seems completely over priced right, or could there be a value add play with boosting the rents. This is one of the few apartment complexes in this town and certainly the worst around.
There's a much nicer garden style deal next door getting $900 for a 2bd/2ba 1000 sqft, and $750 for a 1 bd/1ba with 800 sqft.
Another complex down the street is getting $650 for 1beds and 720 for a 2/1 and 750 for a 2/2, but is certainly nicer than the subject.
The owner mentioned the possibility of doing a lease at first as a partnership until I got financing.
I'd appreciate if anyone could input their advice on how they'd look at this deal.
Taxes run about $25k annually Insurance runs about $13k annually
Don’t worry about expenses, they’re always a shit show with these mom and pop owners. Just get a good feel for rents and other income and underwrite your expenses at 50 - 55% of total revenue. If the numbers work, make an offer. If the seller accepts your offer, engage a 3rd party property manage and have them underwrite expenses before you go under contract
+1 on this approach. Out of curiosity: Is 50-55% a high enough expense ratio for a property with such low rent? I have never worked in this end of the MF market...
Also running off this post....
Make sure you are checking to see if the property clears a 1.25-1.30x DSCR. You don't want this property clearing at a 1.10x and then suffering a dip in collections.
As someone who owns several complexes like this on my personal account, I concur with refinance. However, it seems you don’t have experience acquiring/underwriting or operating (from an asset management standpoint) this type of property so I’m not sure you will be able to get financing (especially considering he doesn’t have any clean financials to offer).
If you’re an experience sponsor you can get away with very little financial DD items from a bridge/local lender, but if you’re first-time I would engage with a few early on to see what they will need to pass it through their credit committee. Fannie/Freddie would be out of the question, in my opinion. Be ready to offer full personal recourse...is that a risk you’re willing to take?
The other concern here is collections - I would be curious as to what the economic vacancy is. He might only be collecting half (or less?) these rents and you might be in for an expensive/heavy slog until you’re cash flow positive. Need to make sure you figure this out in DD and underwrite a reserve (operating cash shortfall, lease-up, evictions/legal) or bail on the deal if collections are poor.
Replacement Reserves on a 1990 built property would start at $250/unit minimum, probably $275-300 would be best to UW. Add another $75-$100 per unit for leasing/operating reserves.
To add to my last comment, the best option would likely be to “partner” with the seller through a master lease option or seller finance deal with low money down, if everything checks out in DD...
At $40K per door, I want to know exactly how shitty these apartments are.
In my markets 40K/door is lower than the raw land value.....
Does seem like there are a few outstanding questions before you have a real good sense of the deal. Personally, I'd be a little cautious without a solid 12 months of recurring expenses/solid financials. Do the due diligence. CPA is listed as an expense - try to tap into that source. If they are a good CPA, they should have the lowdown, or you could at least get a sense of the property when speaking to them.
Coming from a portfolio management standpoint where I analyze these sort of expenses and variances year-over-year, I would want to know more about the expenses and how they comp to those other apartments in town. At the very least, you should be able to underwrite them to the property and see if they are excessive (or not enough). Not saying it's happening, but I've seen some shady (at best) allocation of expenses.
Also, what's the reserves/unit look like?
I'd like to know how this shakes out if you go through with it.
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