We need your actual Gross Scheduled Income to start the analysis, not the ‘effective income’. Starting with an “effective income” will screw the analysis six ways from Sunday.
So, what is the actual, scheduled income?
Combine your “vacancy and credit losses” into one figure, not 5% vacancy and 1% “bad debt.” Otherwise, it’s confusing. A credit loss ‘is’ a bad debt.
I have no idea if your NOI is actual or “effective.”
Making broad assumptions since I’ve got time here to guess…
$300,000 Asking Price
$ 90,000 Down Payment (30%)
$210,000 Balance Owed
$ 1,350 Monthly Payment (6.67% 30-years, fully amortized)
$ 44,838 Gross Scheduled Income (Adjusted to compensate for “effective” figure)
<$ 2,538> Less Vacancy and Credit Loss (6% including 1% “bad debt”)
$ 42,300 Gross Effective Income
<$ 11,600> Less Expenses (27.5% of GSI)
$ 30,700 Equals Net Operating Income (66.5% of GSI)
<$ 16,200> Less Debt Service
$ 14,500 Equals Cash Flow Before Taxes
CAP RATE: 10.23%
Cash-on-Cash Return: 16.2%
If these figures are reliable, this would be a good deal. The issue I have is not knowing the age, construction (flat roof, brick/siding, galvanized plumbing, common utilities, actual physical condition and occupancy rate).
The assumption is that this building has copper plumbing, is not more than 30 years old, has a newer pitched roof, with separate utilities, exterior walkways (no interior halls), and is actually operating with a 95% occupancy rate, based on no less than a six-month rolling average (despite the 1% “bad debt” odd-ball item).
Only a new building with no deferred maintenance, in a high-demand area, would operate this efficiently.
I’ve been at this a LOOOONG time and I’m just gonna tell you that making the assumption that you can operate this building on this tight of a working ledge, and you’ll be paying twice to own this building; once to buy it and again to keep it. Just saying.
Figure 50/50 on the expenses, including vacancy and credit losses, and you’ll at least break even. If you figure 50/50 and operate it at 38-42%, you begin to actually realize cash flow after maintenance, management, replacements and reserves are taken into account.
One thing. You will find few people who are honest about their operating numbers, for a number of reasons including pride, greed, and abject dishonesty. Few will offer that replacement reserves are as necessary to the long term operation of a building as is having a plumbing system.
Many owners pocket the reserve capital (spend it) when they should be putting it someplace temporarily to collect interest until it’s needed. These are the same owners that are chronically in a jamb; robbing Peter to pay Paul to keep their buildings from falling apart; or to keep their occupancies from collapsing.
I look for these owners and make creative financing offers to them, because I’m frequently their only “bad management” solution.
As a rough analysis, if the GSI is actually $44,838, then assume you’ve got $22,419 as an NOI. Then whatever you have “left over” is actually a cash-on-cash “profit.”
That all said, profits come from other places besides cutting expenses. Profits can be realized from “any” mortgage pay-down, forced appreciation, market appreciation, higher financing leverage, better management/sales/people skills… and simply not going on ego trips by over-upgrading, or over-improving a given property.
I could say a lot more here, but the bottom line is that I feel you’re gonna wish you hadn’t assumed these numbers were true, and based your analysis on them. They might represent a worthy (challenging) goal, but that’s all.
Good luck! I’m cheering you on…! :beer