Apt Complex Analysis

[CVentures1B12]

Hi all!

Been a while since I got back into the game but I dove back in head first after a rough patch about 6 months ago. Finished out a business plan for my RE investing business and I have found a potential partner ("money man") so that I should be able to skip Residential altogether!
With this in mind, I have just got under contract an 18 unit complex for 86% of FMV and I have 30 days DD. I have MOST things that I need for analysis (deeper than before showing interest) but I just wanted to ask the commercial (apt for this deal) investors out there if they had a list, advice, things that you generally forget about, etc. to guide me on the way to securing this property.
I made sure to have all necessary out clauses with no fees whatsoever to get out of the contract, so it won't hurt me to get out of it if it isn't looking like a great deal. Typical insurance cost? Property Management?
Looking for anything and everything...ask me questions! It will make it easier if I respond to what you want to know because this is the first property I have ever put under contract!

Thanks in advance,
Josh

 

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[bflbob]

Josh:

I use the following when I look at a property...

• Vacancy -- 8% of rents
• Management -- 10% of rents
• Utilities -- Add 10% to their number (and verify their number)
• Maintenance -- $50/unit/month
• Property Taxes -- Verify with City/County based on your purchase price
• Insurance -- Add 10% to their cost, but get a quote before closing
• Closing Costs -- Expect about 6% of purchase price

These percentages may be different in your area, but it's a start.

 

[SteveO]

It is really easy for me to breeze past certain issues but.

How do you know that you are at 86% of FMV? The market value is very dependent on the lending environment which has had a lot of changes recently. Get you lender involved quickly to see what type of loan you can get. They will help you with some of the underwriting so you can determine the current value in their eyes.

There are a lot of good "due diligence" checklists on the internet. Find one that fits your needs and start firing away.

Call for insurance quotes. Find a resource that will walk you through the property tax calculations. IREM has a publication that can give you a general idea of expenses for certain locations. Don't trust what the seller or agent provide to you without checking it all thoroughly.

Property management is so very important. You can find a low cost manager that will likely come with low service. Find strong references and interview many. It is hard to find a management company for a property of this size.

 

[Jill]

...It is hard to find a management company for a property of this size.

At what point does it become easier to find one? And at what point (approx) would you consider having on-site management/leasing agent?

 

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[CVentures1B12]

Alright! This is a start:

bflbob

-Vacancy: Average for area is 6%, but these are 100% occupied...I factored in 7%
-Management - Factored 8%, but know a guy who will probably do it for 6% (new company, hard worker, interviewed him, looking to get units under his belt)
-Utilities - All paid by tenants, though not sure about water (waiting on owner sending bills)
-Maintenance - I like your number...used it...
-Property Taxes - CRS tax report was provided so that is under control
-Insurance - Any recommendations??
-Closing Costs - Seller paying half, so I factored in 3%

SteveO

I have an Uncle who is an appraiser for a national bank and he looked into this one (not officially) and calculated its worth, but I will take your advice and get a lender involved quickly because I am sure it varies from lender to lender.

Also, to the PM, I have already spoken with many and this one is a young guy with a business mind. Recently started his company (about a year ago) and really just was so much more enthusiastic than the others that I met with. This could be a great or a terrible thing...

Insurance...this is the biggest problem (besides getting financing) that I am having...of course, for having about 90% of all DD documents needed in the first day of the binding agreement...not to shabby

Keep the questions coming!?!!!

 

[CVentures1B12]

Wow...they just keep coming!

JScott

Great info, and I actually used your spreadsheet for my analysis. Great stuff...I can't thank you enough. One question on that spreadsheet that I just couldn't figure out...why does the value immediately go down after the first year (yr 2)?? If I was looking at it correctly it was directly based on the Cap rate, but if the cap rate were higher, wouldn't it be a better deal?

 

[SteveO]

It would be hard to support an on-site person on an 18 unit property. I had always used 20 as a minimum but obviously more units would offer more support. There are plenty of examples of people giving rent breaks to residents to gather applications or do certain levels of maintenance but there are risks associated with this type of arrangement.

The owner/operators have a real advantage over you with this size property.

Even at 20+ units, you would need to evaluate whether the expenses could support a full time employee. This size property would rarely have a seperate leasing office so it is helpfull to have your manager live on-site as well.

There is always a delicate balance of finding someone that has sales ability and maintenance skills.

You would need to get to about an 80 unit size to support someone full time in the office and a full time maintenance person.

 

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[bflbob]

Property Taxes - CRS tax report was provided so that is under control

Just be careful. The current taxes are likely based on what the seller bought the place for. Future taxes may be based on what you pay for the place.

The seller might have bought the place 10 years ago for $100,000. Due to valuation increases, you might be paying $200,000. If no valuation study was done in those last 10 years, you might find your taxes doubling based on basis alone.

It is definately worth a call to the tax assesor.

 

[CVentures1B12]

It was last appraised last year...would it change that much? I guess a call to the tax appraiser would still be in order just to make sure.

 

[bflbob]

It was last appraised last year...would it change that much? I guess a call to the tax appraiser would still be in order just to make sure.

An appraisal may have been done by the seller. That's not what I'm talking about though. I'm speaking of when the entire city or county is appraised, house-by-house. That doesn't happen very often.

The call is free, so I'd make it.

 

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[CVentures1B12]

Well...my spreadsheet is about 20 KB over what it will allow me to post. It is extremely informative! Any way that I could get this on here?

 

[bflbob]

Might have to zip the file.