7 units not penciling out

Newbie here, and ran across a deal. Initially I thought it looked good, but seems to be falling short:

7 units
Listed at $290k
Was thinking of coming in at $275k

$275k x 25% down = $206k loan @ 7.49% 30yr = $1438/mo. Debt Service

GOI = $3725/mo.
x50% rule = $1862/mo. NOI

  • $1438/mo. DS
    $424/mo. cash flow or about $60 per door

There is an unused storage room that can be converted into a laundry room, but, I would think that would be max $200/mo. extra.


What’s the GSI?

Figure that out and then subtract the current vacancy factor (or assume one), and then you can calculate the GOI. GOI’s are NOT the starting place when analyzing investments. That will require assumptions that may throw all your numbers off. Start with the Gross Scheduled Income (GSI).

That is, start with what the total rental income is scheduled to be… Everything else falls from that number.

Use this form below to analyze this deal, and 100 more, before you pull the trigger on something like this. This way, you can be your own expert at evaluating income property.

Just saying


Yes, my fault then. The GSI is $3725 (fully occupied currently), so minus 10% vacancy factor the GOI is $3353/mo.

[list]OK, good we got the GSI established.

If the vacancy is 10%, then the rents, by all measures are too high.

We need to be at 5%, on a rolling average. On seven units this can be somewhat hard to measure. However, for a working analysis and negotiations, 10% is conservative.

If you are not paying utilities, except for water, and the building is not older than 1970, you can safely assume the expenses are 50% including the 10% vacancy/credit loss factor.

So, with an annualized GSI of $44,700, your NOI should hover around $22,350.

Subtract your scheduled debt service of $17,256, and you’ve got about $5,000 in cash flow.

Then you’ve got an annual loan-balance reduction (pay-down) and annual depreciation, which will add to the bottom line.

Your raw, initial C.O.C. return is 7.3% (before depreciation and debt reduction)

The CAP rate is only 6.2%.

So, the rents are slightly too high, the cap rate is too low, the C.O.C. return sucks drain water, BUT this is really good for a building this small.

There’s lots of investors who would be happy with these numbers, on a little building like this, in coastal areas especially, where anticipated appreciation rate/rental increases are more than 5% a year.

One question to answer is, “What is the anticipated appreciation/rental income increases for this area?”

Other questions:

  • Will this building need a major overhaul, such as a galvanized plumbing change-out?
  • Does the building have enough upside potential in rents (not obvious from the vacancy factor at this point), to make this deal more attractive.
  • What can you do, if anything, to force the appreciation, significantly?
  • Are the seller’s actual operating numbers higher (worse) than 50% of the GSI?
  • If so, why, and where, are they higher? What can you do to reduce those expenses?
  • Can you get a better rate than 7-plus percent on your financing?
  • Is the building tired looking, and needing a face-lift?
  • How much would that cost, and how much would that allow for an increase in rents, and how quickly could you recover the upgrade expenses?
  • Are the current managers/owners lazy, and is that the reason the vacancy factor is hovering at 10%? Or is there a chronic vacancy factor in the area that is pushing this building to 10% vacancy?

All sorts of questions to ask yourself.

Frankly, the easiest way to increase the returns, and overcome high vacancies and expenses, is to negotiate/create better financing terms for yourself.

For example, the fastest and easiest way to do that is to get the seller to finance all, or part, of the transaction.

  • Can the seller carry the down payment? Or the entire sale price, if you offered him full price?

For example, if you offered full price ($290,000), could/would the seller finance 100% of the project, at say prime rate of 3.5%, fixed, for 10 years?

That would significantly reduce your annual debt service to $15,626, or add $1,630 to your projected bottom line of $5,000.

  • Could you offer more than $290K, and still negotiate an interest rate that provides some cash flow?

If so, it would be a great ‘no down’ portfolio builder, that represented high-leverage, some cash flow, and yet without unnecessary risk.

Why not?

Meantime, what’s the return on ‘nothing down’ with an annual cash-flow of $6,724?

Just food for thought. It’s amazing what terms can do for the bottom line of an otherwise ‘iffy’ deal, huh?

Hows that for bullet-point over-kill?

A NOI-before tax of $422 is a little on the low side for a 7 unit. Generally you should shoot for $100 per door. I believe the cash flow problem is due to the unfavorable loan terms. If you were to get a 30 year at a more reasonable interest rate of 5.75% then your payment would drop to $1,204 and your monthly pre-tax NOI would be $659 which is close enough for my requirements.

This could be a viable opportunity IF the rents reflect market rates in the area and IF the property is in good repair.

Why do you say the rents are too high?

I think this will bee more attractive if I can get better terms on the loan. Well have to look around.

How do you measure potential cash flow from laundry? $20/door power month?

If the vacancy/credit losses are coming in above, or below, 5%, you’re losing money.

Vacancy is above 5%, the rents are too high. Below 5%, the rents are too low.

Meantime, several things can influence the vacancy and credit loss figures, all things being equal, and you don’t own units next to an exposed, sewage processing plant…

It can be the sheer number of turnovers. And/or it can be the length of time it takes you to lease up vacant units (for any number of reasons).

Bottom line: You want to achieve a 95% occupancy rate, which represents the most profitable, if not optimum “operating temperature.”

The following link should help figure vacancy factors on any size building, over 12 months, and also give you a clue on how to figure a rolling average, once you’ve got at least 12 months of data.


Laundry and vending income goes up and down with the vacancy rate, and needs to be included in the Gross Scheduled Income for analysis purposes.

I could say MUCH more, but I would be writing a book.

What I will do, is recommend a book. It’s a property management book, that I own several copies of, written by John Reed, called How to Manage Residential Property for Maximum Cash Flow.

This is a must-have resource for your professional library, and is my property management Bible. It’s not cheap, but it will save make you LOTS of money.

It’s been required reading of each of my apartment managers, and should be for anyone you want managing your income properties.

I get nothing by recommending it, and I don’t recommend anything else this guy writes, for what it’s worth.


Gotcha, thanks for all the input. I will check out that book as well.

My last response to an earlier suggestion regarding going seller financing is that seller motivation is to cash out this property (and his others) to go into a new large development project. Not sure if this is true or not, but, it does eliminate the seller finanCing option.