Any1 want to check my calculations? Want to see if I am on the right track

General Real Estate Investing
1

I was approached from a bandit sign of mine on a property in Sarasota, FL and after discussing the property I convinced him to send me the financials (this is of course without doing my own due diligence) but want to see if I am on the right track.

Based on my findings there is absolutely NO way this will work at the current price and seems to be a terrible deal in which I will run away as fast as possible. This exercise is more for my own knowledge and practice.

Average CAP Rate in Sarasota is 7%, $400k asking price, 6 units
Two - Studio renting at $565
Three - 2 Bed/1 Bath renting at $800
One - 2 Bed/2 Bath renting at $850

The owner actually sent me his 2009 Schedule E Taxes, so this is what was listed on it: (I did not factor in Vacancy rate estimation as I figured these are actual numbers) (Based on full occupancy the GOI would be $52,560 (6 units @ rents = )

GOI: $34,138
(Insurance $1,852)
(Legal/Other $435)
(Repairs $7473)
(Supplies $2037)
(Taxes $4974)
(Utilities $8571) - this is a big negative for me
= $25,342

NOI $8,796

Cap Rate = 8,796/$400k (asking price) = 2.1%

GRM = $400k / $34,138 = 11.7

ROI = Down Payment/NOI
$100,000 (25% of $400k) / $8,796 = 11.7 years

Market Value = NOI/Average Cap Rate
$8796/.07 = $ 61,572 (?)

DCR = NOI / Annual Debt Payments (Assume 6.5% interest, 30 yr = $1,896.20 X 12) - No way a bank would even loan based on DCR
$8,796 / $22,754.40 = .38

Using the same above example - this time I will do a pro forma 2011 (assuming 2009 was a bad time in the market)

GOI $52,560
(Vacancy 10% = $5,256)
(OP Expenses = $25,908 (estimating around 50% of GOI)
= $21,396 (NOI)

Cap Rate = NOI / Asking Price
$21,396 / $400,000 = 5.3%

GRM = Mrkt Price / GOI
$400,000 / $52,560 = 7.6

MV = GRM X NOI
7.6 X $21,396 = $1,626,096 (this can’t be right?)

Another form of MV calculation:
MV = NOI / Average Cap Rate
$21,396 / .07 = $305,657

ROI = NOI / Down Payment (this is ROI based on MY initial investment) - not paying for property
$21,396 / $100,000 = 4.6 yrs

DCR = NOI / Annual Debt Payments
$21,396 / $22,754.40 = .94 (again a bank will not even consider a loan on this)

Let me know your thoughts and if there’s things I may have missed, etc. This is for my own practice, obviously all signs point to no chance on this one and run away as fast as humanely possible. However, wanted to get some other sets of eyes on it and see if I am on track, close, etc.

Thanks much!

2

Realized one error:

Market Value = NOI/Average Cap Rate
$8796/.07 = $ 125,657

(not $61,572)

3

You are also assuming that you can get a 30 year fixed rate residential mortgage for this property.

If you check with your favorite lender, I think you will find that this property will be financed as a commercial property with a 15 year amortization schedule, on a five year balloon. Shorter term loan will make your debt service greater, and lower your DCR ratio even more. It is also possible that the lender will require 30% down payment.

In accounting terms, ROI is a percentage yield = Income/investment. You want to use your actual income after debt service (your cash flow) rather than NOI for this computation. The “investment” amount is your initial out of pocket cash outlay to include your down payment, closing costs, and any rehab needed to get the property ready for rental use.

In your arithmetic, if you use NOI as the income, then the investment number is the amount you paid for the property in an all cash purchase. In other words, with NOI as the numerator, your Cap Rate is the first year ROI.

How long it takes you to recover your invested capital is not really the question to ask, but rather, how does the yield for this investment compare to the yield you might get from some other investment vehicle. With some blue chip stocks paying 6%+ yields right now, I would have a hard time justifying spending more than $100K for a much smaller return.

4

Start your analysis with the GSI, not the GOI… Gross Operating Income is NOT the same figure as the Gross Scheduled Income. Don’t confuse the terms.

When you don’t know what the vacancy factor is, how will knowing the GOI inform you whether the rents are where they need to be, or not? You short-circuit your analysis when your data starts off on the wrong foot.

If the data sheet reflected, say, a 15% vacancy factor, how would you know this by starting with the Gross Operating Income figure? Just asking.

5

Dave T - Thanks for the feedback. That is true that I did use a basic mortgage calculator to come up with the Prin/Int payments to figure out my DCR. Also, you are correct about the cash flow vs NOI - the assumption would be that I am cash flowing the NOI vs actual cash flow to determine the ROI. I will use the ladder going forward and great idea RE comparing to other investment instruments. Appreciated.

Javipa - Thanks for the thoughts. So, going forward to start off with the GSI, I would simply GSI = GOI + Vacancy and Credit Loss. In this case to start with the GSI I would have $52,560 (GOI) + $5256 (assumed 10% vacancy) = $57,816.

Would this be correct?

Thanks for the responses, appreciate it!

6

Take a look at this thread… http://www.reiclub.com/forums/index.php/topic,51233.msg251645.html#msg251645

No, that would not be correct.

7

Javipa- thanks for the link. Helpful information, good learning experience.