Let’s have a little fun, shall we?
As an active investor in apartment complexes, there are few things I like better than analyzing a property. Well, except getting up from the closing table with a done deal, of course!
Analyzing a property is great fun because you really get to crunch the numbers and see what’s actually going to happen. When you’re talking about an apartment with hundreds of units, those $$$ can get very exciting!
Let’s assume that you’ve already gotten to know your area and have found a good property you want to buy, and now it’s time to really see if it’s the right deal.
The example – a 200 unit apartment complex.
Here’s what we’re going to work with:
- 200 unit class B apartment complex.
- Asking price $7 million.
- Cap rate of 10.
- Good area, near shopping, jobs and college.
- 90% occupied.
- Almost no deferred maintenance – a few things that need TLC but no big deal.
- Average rents are at or slightly under market value.
So where do we begin?
Physically Inspect the Property
Remember, you will do a thorough inspection once you have the property under contract, but make sure to give the place a good look before making an offer.
What you want to see…
- Buildings in good condition.
- Landscaping and cleanliness of grounds good to above average.
- Parking lots in reasonably good condition.
- Amenities up to spec – everything works.
- Outdoor lighting okay.
- No obvious environmental issues.
- Apartments in good shape.
Now, the last one may be tough – you won’t have access. However, once you make an offer, you’re free to inspect them. Or you can write a form letter to be distributed to the tenants asking them to cite any issues.
Run Some Comps
Although multi-family properties aren’t bought and sold like houses, it’s still a good idea to run some comps. This means checking out the tax roll and last sale of other apartments of similar size and quality near the one you’re looking into.
Now the fun part!
So here’s what we want to see… if the property is selling for $7 million and it’s at a cap rate of 10% – then it should have an Net Operating Income (NOI) of $700,000 per year.
This is a tricky area, and you have to use some common sense and really dig in once you have the ability to do so.
Because when a property like this is for sale, the Seller tries to reduce expenses and raise the income on paper as high as possible.
The reason is simple: NOI is what determines the price/value.
You always want to figure that when a seller shows you current numbers, they’re probably somewhat “adjusted.” Not that they’re scamming you… it’s a common tactic to do this… you’ll do it too when you sell.
So, examine all expenses and the rent roll and make sure everything jives. In fact, what you want to do is to see 2 years’ worth of everything like financials and rent rolls. This will give you a much more realistic picture.
Is this a good investment?
Assuming the numbers work, here’s what you might have to work with:
- $1,750,000 down payment – 25%
- $5,250,000 mortgage with annual payment of $400,000
- Annual pre-tax cash flow of $300,000
- Potential depreciation of $375,000.
A tax-free income of $300,000 which is about 17% of your cash – not bad. The depreciation saves you having to pay something like $100,000 in taxes – so add another 5% or so.
Even before you raise rents, build equity, or do anything else, this property returns a solid 22% annual return.
That’s pretty darn good in my book!
Want to know more about this investing iceberg?
Get in touch with me or read through the library of other exciting investment articles that explain why apartments are the best investment going!