In this video, we walk through a financial analysis of an apartment building for sale in Colorado Springs. After a brief introduction of the property, we list the assumptions we’ll be making about the possible purchase. These include the proposed LTV of the loan, the amount estimated for reserves and closing costs, the projected annual increases in income and expenses, and the expected vacancy rate.
Next we look very briefly at the spreadsheets that crunch the numbers for us, focusing more on their purpose than their details. Lastly we compare the bottom-line results when we project purchasing the property for two different prices.
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The Bellaire Apartments recently sold to Capital Real Estate of Denver for $19 million. Since it’s a 240 unit community, the price per door was just over $79K, well below the current estimated replacement cost of $120 per unit.
Located in the southeast part of the city, it’s strategically placed between Fort Carson and Peterson Air Force Base. It’s the only class A apartment in that part of town and was 98% full at the time of sale. According to Apartment Realty Advisors co-listing broker Doug Andrews, several large institutional investment groups had submitted letters of intent, but they offered significantly lower bids than the winning buyer. You can read the rest of the story here.
I’ve been studying a property in Austin, Texas lately. It’s an 84-unit apartment that was rehabbed “down to the studs” in 2005. The owner recently installed artificial bermuda grass to reduce maintenance and improve appearances. There is also an outside video surveillance system that is accessible via a password-protected web page.
The asking price is $3.7 million, which given the NOI (see Jargon Explained page) of $295,000 results in a cap rate of 8%. This means that if you had no debt on the property, you would produce an 8% annual return. With a 25% down payment and $185,000 in acquisition and closing costs, the cash-on-cash return would be 10.2%. Giving the investors 75% of the cash flow, they would expect to receive about 7.65% return on their investment. Not bad, but I’m looking to get them at least an 8% return before their 75% share of the back end profits.
Yesterday I had a long talk with John Dennis, a property manager with over 30 years experience in the Austin market (http://www.jldpropertiesinc.com/). One of his services is every six months taking the NOI of the property and combining it with the current Austin cap rate to give a current value. I asked him what he was quoting as the current cap rate in Austin and he said it was 9%.
So, if we use that figure to calculate the value, we lower it to $3,275,000. At that price, we could put down 30% and still raise the cash-on-cash return to 12.1%, giving the investors a return of better than 9%. This, combined with a current vacancy of only one unit, and the fact that Austin ranks number 1 in job growth among large cities for last year, makes this a very attractive investment. We’ll have to see if the current owners are interested in selling at this price.
A few days ago we made an offer on a 28 unit apartment in Colorado Springs. It’s in foreclosure and about 30% full as near as we can tell. The phone number on the management company sign is disconnected and emails bounce. A broker from Denver has started negotiating a short sale with the lender. We offered $700K as is, with an inspection contingency. If they accept our offer (a long shot) we get 60 days to do our due diligence. We can pull out at any time and get our earnest money back.
The property sits on a high hillside with great Peak and foothill views to the west and south. It consists of 7 fourplexes, the first of which was built in 1978 and the rest in 1984. They are a townhome style, with a single attached garage and no one above you.
The two empty units we saw were in pretty decent condition. They had dual-pane vinyl windows and a fireplace. There was a half bath on the main floor. A full bath was upstairs with the two bedrooms. One had a leak at the washer hookup, but it was going down the drain. Stuart turned it off to save water. We later found out he had also turned off the water to the next door unit, so we got to meet one of the neighbors that way.