Apartment Offering – Analysis and Response

So at the BiggerPockets meetup on Tuesday I meet with another investor, she also happens to be a Commercial Broker.  I love meetings!  This would be the second time I’ve met with her, and at the other meeting I had actually invited her to this meeting.  What I forgot to tell her the first time was to send me some leads!

And boy did she send me an interesting offer the yesterday!  I’ve seen other offer memorandums from other brokers, and I always wonder if:

  1.  I am being Tested by the first offering
  2. The Broker doesn’t understand what a Profitable Deal is
  3. People are buying crap
  4. I don’t know how to crunch numbers correctly

So here are the stats real quick:

Police car with emergency lights on
Price $345,000
Price/Unit $28,750
Price/SF $41.07
Number of Units 12
Year Built/Renovated 1962 / 2013
CAP Rate - Current -8.93%
GRM - Current 5.04
Net Operating Income - Current ($30,817)
Total Return - Current -8.9% / -$30,817
CAP Rate - Pro Forma 8.32%
GRM - Pro Forma 4.36
Net Operating Income - Pro Forma $28,698
Total Return - Pro Forma 5.9% / $20,369

So her email asked me to give her my feedback and any questions I had!  Here’s that email:

Investor/Broker,

It was great to see you last night. The bp meetup is a great meeting so different from the other rei meetings in town. After you left Investor A, Investor B and I talked about strategies with these ‘war-zone’ apartments. They did not see the upside potential in these 12 units the biggest problem being turnout costs, and maintenance costs. With the type of tenants that we would be dealing with the costs would grow much higher than what makes it profitable.

According to the memorandum and numbers that you sent, it backs up that theory. The one rented unit in the complex is rented at $400. Which puts the GOI at $58000. Applying the 50% rule leaves 29000 to cover debt service. With a 15 year term and 20% down the annual debt service would be $28000

The most I could justify paying for a property like this would be right around 200k! Which is well below what the previous owner paid for it. And that would be if it was already 100% occupied.

Makes we wish I had the capital to purchase and rehab these, if there’s a lot of interest in 50 year old properties at these prices and these soft rents. Let them know I have a bridge for sale in Montana if they are interested. Ha ha!

Thanks for following up so quickly! I really appreciate it. And if there’s anything I can do to help you out let me know!

 

Right!?!  Now this investor is quick and probably a real great broker, because she was quick to get this sent out to me yesterday.  And then she followed up with a phone call a couple of hours later, and less than the amount of time it took me to crunch the numbers and type out my response she replied back to me.

Hi Troy –

Thank you for your feedback. I will pass it along to the listing agent and his RM. Yes, I agree the property is currently overpriced. I believe the owner is holding a note for $225,000. There would not be an option for any bank financing, due to current occupancy issues, so yes, a cash offer is what it will take to do a deal.

I heard the property next to it was bought at $18K per unit, about 18 months ago. So, if he gets his $35K per unit he is making a nice profit. Right now though, it is almost better to buy the fully occupied building, for the cashflow with a bank loan, for roughly the same money in, as I believe it has a better cash-on-cash return. I have been crunching on another project today, so I did not read the OM through in detail yet. I will double-check, but I understood that 3 of the 12 units were rented, not just 1. …Anyways, I’ll keep an eye out for better deals. In the meantime, send me a bit more detail around your buying criteria and I will setup some alerts.

 

It may just be me and my investing philosophy but I don’t understand how even a full cash offer makes any sense! An annual cash on cash return of a 8.4%?  Are people happy with that?  And that’s assuming the 50% rule.  With the area, tenant class, low rents, and the land-lord is responsible for water, there’s no way expenses are 50%, I’m going to guess the real number would work out to about 65% ($20,300) driving COC to 5.88%

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