I was browsing available properties on the MLS and found an 8 unit building with 1/1s. I know that there is typically high turnover with tenants in 1 bedrooms and especially in low income areas which this property is in. I am familiar with the area as Iused to work in the neighborhood.
One street will have homeless with their shopping carts and then the next street over literally seperated by an alley way will be ritzy condos or apartment buildings or older redone ‘classic’ homes now valued at $300k+. Wierd! (Normal 3/2 in nice neighborhood in dallas is only $100k-$150k)
Anyways trying to analyze these numbers for learnings sake.
Asking price - $123K
Rents - $390 per unit all 8 are rented ATM
Taxrolls have property listed as Commercial and at $56k
Taxes on the property were like under $1,200 a year.
I also noted this is the first time I have ever seen a property drop in value in the last 6 years. It dropped one time back in 2001 from $77k.
So how do you figure if this is a good investment. Do you ignore or not put so much weight to the loss in property value and concentrate on cash flow? Do you use the cap rates of 10%-12% in the area… and what exactly is the calculation to use those %ages?
And as I look for that listing today it is no longer listed so it must have been good for someone… or such a bad deal it finally got DE-listed.
When you venture in to commerical propertys,you have a different ball game! Many companies will buy for speculation,tax write off,or just because they wake up happy one day!
People who have tons of money think in many different ways! Speculation is one of the best motivators in this business. Say you get an inside tip on a company looking to buy property to put in a department store! Location/location/location! A small area with run down conditions,and the price is right!!! See what I mean??
From a cash flow standpoint this property is very good. From the proforma calculations, this property delivers almost $2000 a month at 5% vacancy allowance. I also factored in 4% for maintenance and $1000 for insurance. If there are other costs you’ll need to include those as well. One of the biggest expenses with commercial properties is deferred maintenance such as a leaky roof that caves in. It can cost a lot of money.
Nonetheless, based on the numbers, this property has a 25.91% cap rate which is very high and a cash on cash return of over 80% assuming a 30 year fixed at 7.25% with 20% down. You rarely find numbers that look this good.
There are several quick number comparisons to use in quickly comparing multi family and other commercial deals. The cap rate is the best probably. It is in simple terms the Net operating income divided by the value or asking price. NOI is total collections less expenses not including debt service or income taxes. It does include property tax, insurance , maintenance, salaries etc. I said simple because there is always different ways of figuring the NOI. Do you take the real numbers or pro-forma numbers. Do you add a maintenance reserve etc.
As some examples NNN blue collar commercial deals will have a low cap rate of maybe 5% in todays market. Low income multi-family units should have a lot higher cap rate at least 10 to 12% if not even higher. A high quality apt building may be priced and valued at 7 to 8%.
Some other quick reference numbers are:
Price per unit
Price per square foot
Gross rent multiplier
The GRM is used a lot as well and only considers the total rent. The lower the multiplier the better the deal. A building that rents for $1000 per month would have a total gross income of $12,000 per year and at a 4 times gross multiplier would have a market value of $48,000. In hotter markets the value may be $120,000 or 10 times the gross income.
It can be confusing and I hope my attempt to explain it has helped. LOL