This building last sold for $600 000 in 2005. Our purchase price is
$277 416 and at this time that price is still negotiable with the seller if a buyer/investor acts immediately.
When
going through the September financials, I have realized that the
financials are not complete, with many expenses missing. I have
included re-worked financials for current and projected future
operations.
I have confirmed that the rent roll shown in the September 30
financials are correct, according to my inspection three weeks ago.
This building is separately metered for electricity and heat is
provided by electric heaters on the wall in each unit, also billed to
the tenant. So, the building owner only pays common area
electricity. This building is perfect for a condo conversion.
Condos near downtown, such as this one, are selling for very
strong prices.
There is a boiler system in the building that could also be functioning
with some additional work. There are two newer hot water heaters and nice leased washer and dryer for tenants.
This building already has a security fence securing 3 sides of the
property and the addition of a gated entrance could add additional
value.
Current Operations:
| Gross rental Income |
(per year) |
|
|
59,400.00 |
| Deliquency (estimate of potential) |
|
11,200.00 |
| Other Income (fees, laundry) |
|
|
2,760.00 |
| Net Income |
|
|
|
50,960.00 |
|
|
|
|
|
|
| Operating Expenses: |
(per year) |
|
|
|
|
Management and Wages |
|
3,500.00 |
|
advertising |
|
|
250.00 |
|
accounting |
|
|
0.00 |
|
trash removal |
|
|
400.00 |
|
eviction notices |
|
|
300.00 |
|
cleaning (caretaker) |
|
|
0.00 |
|
property insurance |
|
|
2,000.00 |
|
licenses and taxes |
|
|
14,000.00 |
|
pest control |
|
|
3,000.00 |
|
repairs and maintenance |
|
6,000.00 |
|
bank fees |
|
|
|
0.00 |
|
lawn maintenance (caretaker) |
|
600.00 |
|
supplies |
|
|
|
0.00 |
|
payroll taxes |
|
|
0.00 |
|
telephone |
|
|
|
0.00 |
|
interest on deposits |
|
|
0.00 |
|
Replacement Reserve ($150/unit) |
3,150.00 |
|
utilities (estimate of water bill) |
|
20,000.00 |
| Total Operating Expenses: |
|
|
53,200.00 |
|
|
|
|
|
|
| Net Operating Income: |
|
|
760.00 |
| Debt Service: |
|
|
|
0.00 |
|
|
|
|
|
|
| Annual Cashflow: |
|
|
|
-2240.00 |
Repairs and Renovations to Vacant Apartments:
My contractor has estimated repairs at $650 for each occupied unit and
$8200 for a full rehab of each vacant unit. I had a roofer
inspect the roof and gave a quote of $3200 for roof patching and
repair. My contractor reported that the roof was generally in
good shape.
Cost of repairs and renovations:
$8200 * 9 = $73 800
$650 * 12 = $7800
roof repair = $3200
Total renovation costs = $98 368
My local contractor believes that we can rent the newly renovated
vacant units for $650 once completed. We will assume to continue
the occupied units at current rents. I think that
$650 is a possibility in three or four years, once the light rapid
train station is completed nearby, but will use a more conservative
$550 rent for newly renovated units at this time, exceptfor the vacant
2 BD which should get $600 or $650. There are nine vacant units.
Once we lease four of them, here is the annual cash flow calculations:
| Gross rental Income |
(per year) |
|
|
85,800.00 |
| Deliquency (estimate of potential) |
|
11,200.00 |
| Other Income (fees, laundry) |
|
|
2,760.00 |
| Net Income |
|
|
|
77,360.00 |
|
|
|
|
|
|
| Operating Expenses: |
(per year) |
|
|
|
|
Management and Wages |
|
4,290.00 |
|
advertising |
|
|
250.00 |
|
accounting |
|
|
0.00 |
|
trash removal |
|
|
400.00 |
|
eviction notices |
|
|
300.00 |
|
cleaning (caretaker) |
|
|
0.00 |
|
property insurance |
|
|
2,000.00 |
|
licenses and taxes |
|
|
14,000.00 |
|
pest control |
|
|
3,000.00 |
|
repairs and maintenance |
|
6,000.00 |
|
bank fees |
|
|
|
0.00 |
|
lawn maintenance (caretaker) |
|
600.00 |
|
supplies |
|
|
|
0.00 |
|
payroll taxes |
|
|
0.00 |
|
telephone |
|
|
|
0.00 |
|
interest on deposits |
|
|
0.00 |
|
Replacement Reserve ($150/unit) |
3,150.00 |
|
utilities (estimate of water bill) |
|
25,000.00 |
| Total Operating Expenses: |
|
|
58,990.00 |
|
|
|
|
|
|
| Net Operating Income: |
|
|
18,370.00 |
| Debt Service: |
|
|
|
0.00 |
|
|
|
|
|
|
| Annual Cashflow: |
|
|
|
18,370.00 |
Once we rent four more renovated units, leaving one vacant as a vacancy buffer, here is the cash flow going forward:
| Gross rental Income |
(per year) |
|
|
112,600.00 |
| Deliquency (estimate of potential) |
|
11,200.00 |
| Other Income (fees, laundry) |
|
|
2,760.00 |
| Net Income |
|
|
|
104,160.00 |
|
|
|
|
|
|
| Operating Expenses: |
(per year) |
|
|
|
|
Management and Wages |
|
5,610.00 |
|
advertising |
|
|
250.00 |
|
accounting |
|
|
0.00 |
|
trash removal |
|
|
400.00 |
|
eviction notices |
|
|
300.00 |
|
cleaning (caretaker) |
|
|
0.00 |
|
property insurance |
|
|
2,000.00 |
|
licenses and taxes |
|
|
14,000.00 |
|
pest control |
|
|
3,000.00 |
|
repairs and maintenance |
|
6,000.00 |
|
bank fees |
|
|
|
0.00 |
|
lawn maintenance (caretaker) |
|
600.00 |
|
supplies |
|
|
|
0.00 |
|
payroll taxes |
|
|
0.00 |
|
telephone |
|
|
|
0.00 |
|
interest on deposits |
|
|
0.00 |
|
Replacement Reserve ($150/unit) |
3,150.00 |
|
utilities (estimate of water bill) |
|
30,000.00 |
| Total Operating Expenses: |
|
|
65,310.00 |
|
|
|
|
|
|
| Net Operating Income: |
|
|
38,850.00 |
| Debt Service: |
|
|
|
0.00 |
|
|
|
|
|
|
| Annual Cashflow: |
|
|
|
38,850.00 |
My contractor has estimated 90 days to complete all repairs and
renovations. So, it would be reasonable to expect to have the
building leased as above, with one remaining vacancy, after 6 months
maximum. At that point, here are the calculations:
Cap rate on operations = $38 850 / $277 416 = 14% cap rate
Cash on cash return for money invested, including repairs = $277 416 + $98 368 = $375 784
$38 250 / $375 784 = 10% cash on cash return
At that point, you should be able to obtain 80% financing on this
building and pull out most of your money. That would increase
your cash on cash return significantly.
Projected annual income at year four with newly renovated unit rents increased to $650/month:
| Gross rental Income |
(per year) |
|
|
121,800.00 |
| Deliquency (estimate of potential) |
|
18,000.00 |
| Other Income (fees, laundry) |
|
|
2,900.00 |
| Net Income |
|
|
|
106,700.00 |
|
|
|
|
|
|
| Operating Expenses: |
(per year) |
|
|
|
|
Management and Wages |
|
6,090.00 |
|
advertising |
|
|
250.00 |
|
accounting |
|
|
0.00 |
|
trash removal |
|
|
400.00 |
|
eviction notices |
|
|
300.00 |
|
cleaning (caretaker) |
|
|
0.00 |
|
property insurance |
|
|
2,000.00 |
|
licenses and taxes |
|
|
14,000.00 |
|
pest control |
|
|
3,000.00 |
|
repairs and maintenance |
|
6,000.00 |
|
bank fees |
|
|
|
0.00 |
|
lawn maintenance (caretaker) |
|
600.00 |
|
supplies |
|
|
|
0.00 |
|
payroll taxes |
|
|
0.00 |
|
telephone |
|
|
|
0.00 |
|
interest on deposits |
|
|
0.00 |
|
Replacement Reserve ($150/unit) |
3,150.00 |
|
utilities (estimate of water bill) |
|
30,000.00 |
| Total Operating Expenses: |
|
|
65,790.00 |
|
|
|
|
|
|
| Net Operating Income: |
|
|
40,910.00 |
| Debt Service: |
|
|
|
0.00 |
|
|
|
|
|
|
| Annual Cashflow: |
|
|
|
40,910.00 |
Projected annual income at year six with remaining units renovated and all rents at $650/month:
| Gross rental Income |
(per year) |
|
|
163,800.00 |
| Deliquency (estimate of potential) |
|
22,000.00 |
| Other Income (fees, laundry) |
|
|
2,900.00 |
| Net Income |
|
|
|
144,700.00 |
|
|
|
|
|
|
| Operating Expenses: |
(per year) |
|
|
|
|
Management and Wages |
|
8,190.00 |
|
advertising |
|
|
250.00 |
|
accounting |
|
|
0.00 |
|
trash removal |
|
|
400.00 |
|
eviction notices |
|
|
300.00 |
|
cleaning (caretaker) |
|
|
0.00 |
|
property insurance |
|
|
2,000.00 |
|
licenses and taxes |
|
|
14,000.00 |
|
pest control |
|
|
3,000.00 |
|
repairs and maintenance |
|
7,000.00 |
|
bank fees |
|
|
|
0.00 |
|
lawn maintenance (caretaker) |
|
600.00 |
|
supplies |
|
|
|
0.00 |
|
payroll taxes |
|
|
0.00 |
|
telephone |
|
|
|
0.00 |
|
interest on deposits |
|
|
0.00 |
|
Replacement Reserve ($150/unit) |
3,150.00 |
|
utilities (estimate of water bill) |
|
30,000.00 |
| Total Operating Expenses: |
|
|
68,890.00 |
|
|
|
|
|
|
| Net Operating Income: |
|
|
75,810.00 |
| Debt Service: |
|
|
|
0.00 |
|
|
|
|
|
|
| Annual Cashflow: |
|
|
|
75,810.00 |
Projected Year 7 Cap Rate: $75 810 / $277 416 = 27.3%
The building appeared to be structurally sound from my inspection.
I have building structural experience. Unit #306 has a
couple drywall cracks at the top corners of the balcony door.
This could be due to the building settling or the balcony needing a repair to its supports, but
nothing was obvious as an issue during our inspection. You can
see the cracks in the pictures given in the link at bottom of email.
There is a bed bug problem currently in the building as well as mice.
Pest control is recommended immediately and I included $3000/year
for pest control in the above financial calculations.
The wall mounted electrical heaters are generally warming the units in
the winter, although some tenants complained of high electricity bills
and lack of efficiency due to the old
windows. It would be beneficial to get the boiler running in the
future. There are three units with new balcony doors already
in place. It would be a beneficial upgrade to replace the
remaining balcony doors and all windows in the future. Only the windows
in one of the vacant units, #101, are cracked and need replacement at
same time as renovations.
The tenant electrical meters are working fine. The common area
electrical meter was not of the sufficient size and has been removed.
An electrician will need to install a new
electrical meter to meet the standards of the power company.
Picture of this included.
The water company wants to change the water meter, but cannot until a
shut-off valve is replaced in the utility room. I would estimate
a cost of $200. Picture in link.
Unit #207 is occupied by an experienced caretaker with some broker
experience. He cleans the building and currently does property
management for his free rent. In the cash flow
analysis, I included an additional 5% fee for an outside property
management involvement, but this might not be necessary if you work
with the caretaker. I would do this if I am involved with the operations of the building.
From my inspection, all sinks have been upgraded to PCV. The
kitchen cabinets in most units are good and only require new paint to
refresh. Most units have newer bathroom cabinets.
Eight units have balconies, which are a distinct local advantage.
Balconies appear to be structurally sound, but most require the wooden floorboard replaced due to rot.
Virginia Street is very attractive, with original "Belgian Block" road
(similar to cobblestone, but with square bricks set in the road) and
high curbs. The parking lot for this building is still
functional, although could use a repaving in the future.
Some of the vacant units need appliances, included in my contractor's
estimate. Many of the occupied units already have renovations
done in the past, such as tile flooring, upgraded bathroom cabinets,
and wooden floors. Please review the pictures to see these.
Most of the units really only need new flooring and cleaning and
caulking around the bathtubs to bring them to minimum rental condition,
so a full renovation in each vacant unit, such as my contractor
suggested, may not be necessary to rent it again at $450 or $500/month.
The tenant base in this building was decent. I have been in far
worse complexes in Phoenix and I did not feel in danger at all during
my inspection. Most of the current tenants could remain, as long as
they continue to pay their rent, and you could attract new higher
quality tenants through targeted marketing to professionals working downtown
and in New Center. This will become easier once the train station is completed in 2016.
Please review pictures of the building and individual units here at the
link below. Please contact me asap if you have any further questions or would like to go ahead with this purchase.
Johnson Frais
Acquisitions Manager
PassionRight Properties
