Property Investigation: Apartment Found

While I continue to wait for Las Vegas to sell, I’ve been poking around up here in Washington State looking for our next move.  The greater Puget Sound Area is getting killed with compressed Cap Rates getting as low as 4.5%!  I guess if you are paying cash it beats mutual funds or bond investing, but if you are trying to finance the property, you are going to be cash flow negative! So, with that in mind, I took to outlying areas and am searching a couple of hours outside of the region to find property.

I found a couple luke warm deals, and I found a smoking hot deal!  I still can’t believe that this is sitting on the market, and it makes me wonder if it is a really huge problem, or if it’s one of those diamonds in the rough that no-one has picked up to polish.

Purchase $475,000.00
Units 36
Rent $450.00

Prevalent C.A.P. rates are hanging out in the 6.5%.  Quick math shows that there is something off kilter here. Lets do the math:

  1. 36 units x $450 = 16,200wow
  2. 16,200 with 90% vacancy = $14,580
  3. Apply 50% rule = $7,290
  4. Annualized: $7,290 x 12 = $87,480
  5. Apply the CAP Rate = $1,345,846!

Sale Price of $475,000, with an Income Approach Valuation of $1,345,846 gives us almost $875,000 in equity!

I should note, that you should never, ever, ever pay for what a property could produce, but what it is actually making.  We work in reverse and we can see that the property probably has an NOI of $30,875 ($475,00 * .065).   With such a great difference between what NOI should be and what it is, gives us insight that there is SOMETHING going wrong with this property.  Our job as investors is to uncover what that SOMETHING is and decide if it is a variable that we can control, and change, or if it is an environmental or socio-economic variable.

Here are the numbers that I plugged into my worksheet.  The first one based on Pro-Forma, and the second one based upon my experience in Las Vegas with my fourplexes.

Projected Based on My Vegas Experience
Annualized: Annualized:
GSI $194,400.00 GSI $194,400.00
Vacancy $9,720.00 Vacancy $9,720.00
GOI $184,680.00 GOI $184,680.00
Maint $23,085.00 12.50% Maint $32,000.00 17.33%
Management $23,085.00 12.50% Actual Management $23,085.00 12.50%
Account/Legal $2,160.00 1.17% Actual 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% Actual 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 $32,000.00 17.33%
Taxes $5,367.50 11.30% Actual Taxes $5,367.50 2.91%
Total Exp $89,082.50 45.33% Total Exp $109,312.50 59.19%
NOI $95,597.50 NOI $75,367.50
Mortgage $30,660.61 Mortgage $30,660.61
Free Cash Flow $64,936.89 Free Cash Flow $44,706.89
DSCR 3.12 DSCR 2.46


Those are great numbers!  Even if I apply the crazy expense ratio I’m hitting in Las Vegas in a C- neighborhood with a tenant class that I am not happy with.  Fortunately, I feel as if the area that this apartment in is a solid C, with the potential for a higher class tenant.  A couple of things tell me this, and that the area is starting gentrify.

Hospital Zone. So this is one of those crazy ideas I get, but there is a hospital two blocks away.  What if I did furnished studios for Medical Rotations?  I could get a higher class working tenant, supply utilities, and other fun things and increase the rents for providing some place close to the hospital for people living in the area for short-term.  3 – 6 months.  It’s also within a mile of a local State University nursing college. My network has a hand full of people who are in the medical industry. A cousin who is a nurse, and good friend who is a medical lab technician. So on my list of things to do I’ve added talking to them about how they found housing while on rotation, and what they were looking for in those properties.

Recently Renovated Units. Looking around on postlets and crachic apartmentigslist I found apartments within a mile of the target property I found 1 and 2 bedroom apartments renting at $1100 to $1500 a month.  They are newly renovated units that have that ‘Hipster’ or ‘Chic’ look to them.  I’ve also noticed that a lot of hip restaurants and bars are open in the area.  The area could gentrify quickly; the signs are there.

Those are the great things that I see in this property.  SOMETHING is wrong with the property.  A big SOMETHING because these numbers just don’t make sense. It’s going to take some digging to find out what is wrong the property, but that’s why we get due diligence periods after putting an offer on a property.  We as investors need to make sure that we understand that to find the best deals we need to be aware of risk and issues that can depress the price of a property. And then, we need to be ready to deal with those issues and turn those issues into profit potentials.

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