Apartment Investigation: Spreadsheets and Exit Strategies

I went out and walked through the property, came home and worked on this proposal to purchase the property:

 

 APARTMENT

COMPLEX PROPOSAL

Executive Summary

The Apartment Complex is a 36 unit building Centrally located in Spokane.

Listed Sales Price: $475,000

Listing Brokers Suggested Offer Price: $410,000

Current Rents: $325

Local Average Rental Price: $450

Current Occupancy: 20%

Local Area Occupancy Rate: 97%

Prevalent Spokane Cap Rate: 6.5%

New Roof Installed in 2012

On-Site Laundry Facility

Newly Installed Security Fence Around Property

Proforma Summary

Projected Based on My Vegas Experience
Annualized: Annualized:
GSI $194,400.00 GSI $194,400.00
Laundry/Coin Op $0.00
Vacancy 21.6 Vacancy $9,720.00
-$9,720.00
$0.00
GOI $184,680.00 GOI $184,680.00
Maint $23,085.00 12.50% Maint $44,160.00 23.91%
Management $23,085.00 12.50% Management $23,085.00 12.50%
Account/Legal $2,160.00 1.17% Account/Legal $2,160.00 1.17%
Evictions $1,500.00 0.81% Evictions $1,500.00 0.81%
Advert $900.00 0.49% Advert $900.00 0.49%
Insurance $1,500.00 0.81% Insurance $1,500.00 0.81%
Utilities $2,400.00 1.30% Utilities $4,800.00 2.60%
Trash $6,000.00 3.25% Trash $6,000.00 3.25%
CapEx $23,085.00 12.50% CapEx $32,005.04 17.33%
Taxes $6,762.67 1.42% Taxes $6,762.67 3.66%
Total Exp $90,477.67 45.33% Total Exp $122,872.71 66.53%
NOI $94,202.33 NOI $61,807.29
Mortgage $42,016.39 Mortgage $42,016.39
Free Cash Flow $52,185.94 Free Cash Flow $19,790.90
DSCR 2.24 DSCR 1.47

We have experience managing properties in C class neighborhoods with tenants that require a greater level of oversight and management. This positions us to manage the Danmore Apartment complex, more effectively than the current owner/managers.

The proforma calculations present a very rosy picture of that the property could cause an investor to overpay for the property and run into a more difficult operating situation than investors who are experienced in running low-income properties.

There are 2 areas where we can immediately increase Operating Income:

  1. Increase the Use of the Laundry Facilities and adding additional Coin-Operated devices

  2. Remove the Old Boiler and turning the basement into Rent-able Storage Units

Rehab Costs and Estimates

Flooring 7100 $5.75 $40,825.00 $1,134.03 $38,083.33
Interior Painting 7100 $1.75 $12,425.00 $345.14
Boiler Remvoal $25,000.00 $694.44
Wall Removal 36 $1,000.00 $36,000.00 $1,000.00
Kitchens
Range 36 $399.00 $14,364.00 $1,915.00 $22,980.00
Range Hoods 36 $43.00 $1,548.00
Refrigerator 36 $499.00 $17,964.00
Cabinets $0.00
Undersink 36 $134.00 $4,824.00
Base Left 36 $121.00 $4,356.00
Base Right 36 $121.00 $4,356.00
Upper Left 36 $113.00 $4,068.00
Upper Center 36 $113.00 $4,068.00
Upper Right 36 $113.00 $4,068.00
Counter Top
Sink 36 $82.00 $2,952.00
Faucet 36 $37.00 $1,332.00
Counter Top 36 $140.00 $5,040.00
Bathrooms
Vanity W/ Sink 36 $98.00 $3,528.00 $333.00 $3,996.00
Faucet 36 $27.00 $972.00
Plumbing Kit $0.00
Accessory Kits 36 $30.00 $1,080.00
Medicine Cabinet 36 $30.00 $1,080.00
Toilets 36 $98.00 $3,528.00
Mirror 36 $20.00 $720.00
Shower Rod 36 $14.00 $504.00
Shower Head 36 $16.00 $576.00
Misc
$0.00 $400.75 $4,809.00
Exterior Doors 36 $99.00 $3,564.00
Interior Doors 36 $37.00 $1,332.00
Outlets 360 $0.96 $345.60
Switches 180 $1.03 $185.40
Vinyl Windows 36 $250.00 $9,000.00
Estimated $209,605.00 $5,822.36 $69,868.33
Budget Over Run 40.00% $293,447.00 $8,151.31 $97,815.67

Exit Strategies

Classic Buy & Hold Strategy – 5 Year Horizon

Price $425,000.00 $241,666.67
Rehab $300,000.00
GSI $97,200.00 $198,288.00 $202,253.76 $206,298.84 $210,424.81
Laundry/Coin Op $4,320.00 $8,640.00 $8,812.80 $8,989.06 $9,168.84
Storage $720.00 $1,440.00 $1,468.80 $1,498.18 $1,528.14
Vacancy $4,860.00 $4,957.20 $5,056.34 $5,157.47 $5,260.62
$0.00 $0.00 $0.00 $0.00
$0.00 $0.00 $0.00 $0.00
GOI $92,340.00 $193,330.80 $197,197.42 $201,141.36 $205,164.19
Maint $44,160.00 $45,043.20 $45,944.06 $46,862.95 $47,800.20
Management $11,080.80 $11,302.42 $11,528.46 $11,759.03 $11,994.21
Account/Legal $2,160.00 $2,203.20 $2,247.26 $2,292.21 $2,338.05
Evictions $1,500.00 $1,530.00 $1,560.60 $1,591.81 $1,623.65
Advert $900.00 $918.00 $936.36 $955.09 $974.19
Insurance $1,500.00 $1,530.00 $1,560.60 $1,591.81 $1,623.65
Utilities $4,800.00 $4,896.00 $4,993.92 $5,093.80 $5,195.67
Trash $6,000.00 $6,120.00 $6,242.40 $6,367.25 $6,494.59
CapEx $11,542.50 $11,773.35 $12,008.82 $12,248.99 $12,493.97
Taxes $6,035.00 $6,155.70 $6,278.81 $6,404.39 $6,532.48
Total Exp $89,678.30 $91,471.87 $93,301.30 $95,167.33 $97,070.68
NOI $7,701.70 $111,938.93 $114,177.71 $116,461.27 $118,790.49
Mortgage $32,931.76 $32,931.76 $32,931.76 $32,931.76 $32,931.76
$0.00 $0.00 $0.00 $0.00
Free Cash Flow -$20,910.06 $87,647.17 $90,058.75 $92,518.56 $95,027.57
DSCR 0.23 3.4 3.47 3.54 3.61
Loan Interest Term
$483,333.33 5.5 30
$2,744.31 Year 1 Year 2 Year 3 Year 4 Year 5
Balance $483,333.33 $476,984.90 $470,636.48 $464,288.05 $457,939.62
Interest Payments $26,583.33 $26,583.33 $26,583.33 $26,583.33 $26,583.33
Principal $6,348.43 $6,348.43 $6,348.43 $6,348.43 $6,348.43
Projected Cash Flow -$20,910 $87,647 $90,059 $92,519 $95,028
ROI -6.03% 32.87% 72.76% 113.67% 155.62%
COC -8.65% 36.27% 37.27% 38.28% 39.32%
Value @ 5 Cap $154,034 $2,238,779 $2,283,554 $2,329,225 $2,375,810
Value @ 6.5 Cap $118,488 $1,722,137 $1,756,580 $1,791,712 $1,827,546
Value @ 10 Cap $77,017 $1,119,389 $1,141,777 $1,164,613 $1,187,905
ROI -$364,845.64 $1,238,804.11 $1,273,246.86 $1,308,378.47 $1,344,212.70
ROI on Sale -150.97% 512.61% 526.86% 541.40% 556.23%
Buy And Hold

Furnished Housing – 5 Year Horizon

Price $425,000.00 $289,473.07 8798 36
Rehab $443,419.20 625
GSI $135,000.00 $275,400.00 $280,908.00 $286,526.16 $292,256.68
Laundry/Coin Op $8,640.00 $8,812.80 $8,989.06 $9,168.84 $9,352.21
Storage $1,440.00 $1,468.80 $1,498.18 $1,528.14 $1,558.70
Vacancy $6,750.00 $6,885.00 $7,022.70 $7,163.15 $7,306.42
$0.00 $0.00 $0.00 $0.00
$0.00 $0.00 $0.00 $0.00
GOI $128,250.00 $268,515.00 $273,885.30 $279,363.01 $284,950.27
Maint $20,250.00 $41,310.00 $42,136.20 $42,978.92 $43,838.50
Management $15,390.00 $15,697.80 $16,011.76 $16,331.99 $16,658.63
Account/Legal $2,160.00 $2,203.20 $2,247.26 $2,292.21 $2,338.05
Evictions $1,500.00 $1,530.00 $1,560.60 $1,591.81 $1,623.65
Advert $900.00 $918.00 $936.36 $955.09 $974.19
Insurance $1,500.00 $1,530.00 $1,560.60 $1,591.81 $1,623.65
Utilities $4,800.00 $4,896.00 $4,993.92 $5,093.80 $5,195.67
Trash $6,000.00 $6,120.00 $6,242.40 $6,367.25 $6,494.59
CapEx $16,031.25 $16,351.88 $16,678.91 $17,012.49 $17,352.74
Taxes $6,035.00 $6,155.70 $6,278.81 $6,404.39 $6,532.48
Total Exp $74,566.25 $76,057.58 $77,578.73 $79,130.30 $80,712.91
NOI $63,763.75 $202,739.03 $206,793.81 $210,929.68 $215,148.28
Mortgage $39,446.31 $39,446.31 $39,446.31 $39,446.31 $39,446.31
$0.00 $0.00 $0.00 $0.00
Free Cash Flow $32,957.44 $172,105.52 $176,336.55 $180,652.21 $185,054.18
DSCR 1.62 5.14 5.24 5.35 5.45
Loan Interest Term
$578,946.13 5.5 30
$3,287.19 Year 1 Year 2 Year 3 Year 4 Year 5
Balance $578,946.13 $571,341.86 $563,737.59 $556,133.32 $548,529.04
Interest Payments $31,842.04 $31,842.04 $31,842.04 $31,842.04 $31,842.04
Principal $7,604.27 $7,604.27 $7,604.27 $7,604.27 $7,604.27
Projected Cash Flow $32,957 $172,106 $176,337 $180,652 $185,054
ROI 14.01% 76.09% 139.64% 204.67% 271.23%
COC 11.39% 59.45% 60.92% 62.41% 63.93%
Value @ 5 Cap $1,275,275 $4,054,781 $4,135,876 $4,218,594 $4,302,966
Value @ 6.5 Cap $980,981 $3,119,062 $3,181,443 $3,245,072 $3,309,973
Value @ 10 Cap $637,638 $2,027,390 $2,067,938 $2,109,297 $2,151,483
ROI $402,034.64 $2,540,115.79 $2,602,497.03 $2,666,125.89 $2,731,027.33
ROI on Sale 138.88% 877.50% 899.05% 921.03% 943.45%
Furnished Rentals

Stepped Repair Spread out over 3 years

Price $425,000.00 $175,000.00
Rehab $100,000.00
GSI $32,400.00 $99,144.00 $165,240.00 $176,256.00 $179,781.12
Laundry/Coin Op $4,320.00 $8,640.00 $8,812.80 $8,989.06 $9,168.84
Storage $720.00 $1,440.00 $1,468.80 $1,498.18 $1,528.14
Vacancy $1,620.00 $1,652.40 $1,685.45 $1,719.16 $1,753.54
$0.00 $0.00 $0.00 $0.00
$0.00 $0.00 $0.00 $0.00
GOI $30,780.00 $97,491.60 $163,554.55 $174,536.84 $178,027.58
Maint $44,160.00 $45,043.20 $45,944.06 $46,862.95 $47,800.20
Management $3,693.60 $3,767.47 $3,842.82 $3,919.68 $3,998.07
Account/Legal $2,160.00 $2,203.20 $2,247.26 $2,292.21 $2,338.05
Evictions $1,500.00 $1,530.00 $1,560.60 $1,591.81 $1,623.65
Advert $900.00 $918.00 $936.36 $955.09 $974.19
Insurance $1,500.00 $1,530.00 $1,560.60 $1,591.81 $1,623.65
Utilities $4,800.00 $4,896.00 $4,993.92 $5,093.80 $5,195.67
Trash $6,000.00 $6,120.00 $6,242.40 $6,367.25 $6,494.59
CapEx $3,847.50 $3,924.45 $4,002.94 $4,083.00 $4,164.66
Taxes $6,035.00 $6,155.70 $6,278.81 $6,404.39 $6,532.48
Total Exp $74,596.10 $76,088.02 $77,609.78 $79,161.98 $80,745.22
NOI -$38,776.10 $31,483.58 $96,226.37 $105,862.10 $107,979.34
Mortgage $23,847.14 $23,847.14 $23,847.14 $23,847.14 $23,847.14
$0.00 $0.00 $0.00 $0.00
Free Cash Flow -$58,303.24 $16,276.44 $81,192.03 $91,004.01 $93,301.04
DSCR -1.63 1.32 4.04 4.44 4.53
Loan Interest Term
$350,000.00 5.5 30
$1,987.26 Year 1 Year 2 Year 3 Year 4 Year 5
Balance $350,000.00 $420,000.00 $560,000.00 $700,000.00 $840,000.00
Interest Payments $19,250.00 $23,100.00 $26,950.00 $23,100.00 $19,250.00
Principal $4,597.14 $5,516.57 $6,435.99 $6,435.99 $6,435.99
Projected Cash Flow -$58,303 $16,276 $81,192 $91,004 $93,301
ROI -30.69% -18.24% 31.84% 87.52% 144.51%
COC -33.32% 9.30% 46.40% 52.00% 53.31%
Value @ 5 Cap -$775,522 $629,672 $1,924,527 $2,117,242 $2,159,587
Value @ 6.5 Cap -$596,555 $484,363 $1,480,406 $1,628,648 $1,661,221
Value @ 10 Cap -$387,761 $314,836 $962,264 $1,058,621 $1,079,793
ROI -$946,555.38 $134,362.74 $1,130,405.69 $1,278,647.65 $1,311,220.60
ROI on Sale -540.89% 76.78% 645.95% 730.66% 749.27%
70000 70000
$2,384.71 $2,782.17
Buy and Hold Stepped Improvements

Flip to Low Income Housing Coop

Price $425,000.00 $141,666.67
Rehab
GSI $27,000.00
Laundry/Coin Op $4,320.00
Storage $720.00
Vacancy $1,350.00
GOI $25,650.00
Maint $6,133.33
Management $3,078.00
Account/Legal $2,160.00
Evictions $1,500.00
Advert $900.00
Insurance $1,500.00
Utilities $4,800.00
Trash $2,000.00
CapEx $3,206.25
Taxes $6,035.00
Total Exp $31,312.58
NOI -$622.58
Mortgage $19,304.83
Free Cash Flow -$15,607.41
DSCR -0.03
Loan Interest
$283,333.33 5.5
$1,608.74 Year 1  
Balance $283,333.33
Interest Payments $15,583.33
Principal $3,721.49
Projected Cash Flow -$15,607
ROI -8.39%
COC -11.02%
Value @ 5 Cap -$12,452
Value @ 6.5 Cap $1,000,000
Value @ 10 Cap -$6,226
ROI $716,666.67
ROI on Sale 505.88%
Flip to Non Profit

Lingo Primer:

DEFINITION of ‘Capitalization Rate’

A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor’s potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property. If you want to get technical, it is basically the discount rate of a perpetuity.

Capitalization Rate = Yearly Income/Total Value

Also known as “cap rate”.

NOI = Net Operating Income. Income From property after all expenses have been paid, including taxes, but excluding debt service (mortgage payments)

GSI = Gross Scheduled Income. The prevalent rental price multiplied by the amount of units available

GOI = Gross Operating Income. Gross Scheduled Income minus the any expected vacancies usually 5%

DEFINITION of ‘Debt-Service Coverage Ratio – DSCR’

In personal finance, it is a ratio used by bank loan officers in determining income property loans. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.

In general, it is calculated by:

DSCR = Net Operating Income / Total Debt Service

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