Tuesday, October 21, 2014

Apartment building with low rents

Property X is listed on the resale market.  It is a very attractive building in a great location, but it has very low rents.  It seems really expensive asking price of $800,000 for a net income of $34,500.  Based upon today's market, this building is likely worth $650,000, based upon an income approach.

The rents are between $1000 and $1500 low per month.  This means it will not cash flow well now.  The property actual will lose about $60 per month in it's current configuration.

With some slight changes, the property can be brought to cash flow positive immediately.  There are two additional income sources a savy owner can take advantage of: 2 parking spaces, which should rent for $100 per month and coin laundry, which on 6 bedrooms should generate $50 to $75 per month.

This leads to another $250 monthly, or $3000 annually.  Wiping out the $60 a month loss and creating a small $200 per month of cash flow.

The big secret to changing this building is to turn over the suites.  Increasing your monthly rental income has a drastic effect on the value of the property. 

By increasing your monthly rent, assuming an increase of $1250 per month ($312.50 per suite per month), this means the net income goes from $34,482 to $49,482  which supports a value of $899,000 ($49,482 divided by 5.5%).

There is also a potential to put another suite in the basement, likely a one bedroom.  If the basement one bedroom can rent for $900 a month, that means an additional income of $10,800 increases the value of the building by $196,000 ($10,800 divided by 5.5%)

The total income would then be $60,282 with a 5.5% cap is a value of $1,096,000

Let's assume you can buy for $775,000 plus $50,000 (estimate for a one bedroom suite construction) is $825,000 - meaning and equity bump of $271,000.  The other interesting development is that this property will now cash flow over $1000 per month.

*** This is predicated on increasing rents and using the cap rates to validate the appraised values.

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