Looking at a building with the following:
10- 1Bed 1 bath rents for $475 Ea
2- Buffet $375 month
Asking $395,000
I figure the most I could offer would be $300,000.
Any thoughts
We have a 6-unit building that’s all 1 bed / 1 bath. Works wonderfully for us. We’ve had single people and a few couples apply to rent from us. You may get some divorcees applying too.
Do a search on here for the “50% rule” and you’ll see plenty on how to value a multi-family property.
I assume it is more Month to Month as opposed to 12 Month Leases?
Cooley - my take on your deal…
Gross rents = 10x$475 + 2x$375 = $5,500 / month
Operating Expenses (50% of Gross Rents) = $2,750
NOI = $2,750
$300,000 mortgage @7%/20 years = $2,326 (P+I) which leaves you with $424 of positive cash flow or approximately $35 per unit. I believe this may not be enough. I believe most people here aim to $100 per unit/month. You would need to get this property for approximately $200k to get that…
Good luck!
This is something I have been reading - it seems that if you are dealing with low income tenants you would be better of doing month to month. It seems easier to get rid of a problem tenant that way. Even if you have a 12 months leasing with a low income tenant and he decides to leave - are you really going to pursue a judgement against him? It seems that most landlords are happy if the tenant leaves without making too much fuss/damage.
If you are dealing with more upscale tenants, than the 12 months lease seems to make sense. If the tenant decides to leave you could pursue a judgement against him and have a chance of getting paid…
Just my 2 cents…
Good luck!
12 units at 5,500 per month goi eqeuls 2,750 per month noi figureing 50% for all expenses. 2,750 per month times 12 = 33,000 per year noi.
noi of 33,000 divided by 10% cap rate= 330,000 sales price. 330,000 @7% for 30 years=2,195.50 p&i
noi 2,750.00
= +554.50 btcf diveded by 10 units= 55.45 per unit
noi of 33,000 divided by 11% cap rate= 300,000 sales price@7% 30 years = 1,995.91 p&i
noi 2,750
= +754.09 btcf by 10 units = 75.40 per unit.
sales price of 300,000 - 20% down = 60,000- 300,000 = 240,000 financed 7% for 30 years = 1,596.73 p&i
noi 2,750.00
= +1,153.27 btcf divided by 10 units= 115.33 per unit positive cash flow. this is also a dscr of 1.72 witch a bank would like to see and a cash on cash return of 23%.
I would probably offer 275,000 witch is a 12% cap rate but go no higher than 300,000. Someone please check my math and everything else for that matter am I right???
Nope. We do 12 month leases on this property because of our situation. Our building is located several hundred miles away from where we live. It’s close to where I grew up and my parents remain. We do the longer leases to cut down on turnover as I don’t want it to be a big pain for my parents to show the place and help us put new tenants in again. This is obviously not the ideal way to do things, but it was the most reasonable way for us to get in the game and the numbers work well on our property.
We’ll be investing local to where we’re living in a few months when I get back from deployment. I then plan on doing month to month for the reasons you stated.
Deep alpha,
I would not evaluate the cash flow of a property by counting your down payment. You wouldn’t say a $1,000,000 property cash flows when it’s rented for $1,000/mo just because you put down $950,000 on it.
2 bd units are usually most desirable, but I think 1 bd units can work if it’s a smaller building. I wouldn’t want a 50 unit building with 1 bd units. Generally speaking, sellers will consider an offer within 10% of their asking price. You’d be lucky to get this building at $330,000, so $300,000 or less would be a miracle. Also, I have found that unless you want to own in a rough part of town it is difficult to get a positive cash flow of $100/unit for a multi-family building. Most are overpriced and yet people still buy them. You really have to dig deap to get a good deal on a good property. If you’re going to buy a property below a cap rate of 10% then buy a leased commercial building where your responsibilities are pratically nothing. It’s pointless to me to buy any type of residential property below a 12% cap rate, just isn’t worth it.
Justin0419,
Do you EVER take a down payment into consideration when makeing your calculations or do you just try and imagine that there is no down payment of any kind at all?
It sounds strange to leave out pertinent information while doing a thorough due diligence on a project. The second calculation found that the property was profitable at the sales price without a down payment figured in. the third calculation only showed what your monthly cash flow would be with the down payment included.
Yes you are correct I never use a down payment to help make a project proffitable or cash flow but I do use it in my complete financial work up of the deal. I was mostly trying to show how to get to the 100.00 per unit figure that everyone talks about.
deep alpha - I believe what Justin is saying (and I agree with him) is that if you include your down payment, any deal can cash flow $100.00 per month. In his example, a $1,000,000 property. If you put $950,000 down, you finance only $50k. You would end up cash flowing $100 per month. But that would still not be a good deal. I hope this makes sense.
Good luck!
j1dias hit it on the head.
From a standpoint of “how much will my payments be for this property,” I agree you obviously want to know what you’ll be paying each month. I’m just saying when you’re screening deals, I would calculate the payments based on the full asking price and run the numbers from that point. As others have pointed out before, your down payment is worth something. You could invest it in a bond or CD and earn a certain rate. You’re not just giving it to get the property; rather you are investing that money and should expect some type of return.
I wouldnt want a 50unit apartment complex all 1brs, but 1br condos and small apartment buildings work well for us and they are easy to keep full, because rents are cheaper.
noi of 33,000 divided by 10% cap rate= 330,000 sales price. 330,000 @7% for 30 years=2,195.50 p&i noi 2,750.00 = +554.50 btcf diveded by 10 units= 55.45 per unitSomeone please check my math and everything else for that matter am I right???
Not quite. This is a 12 unit building, not a 10 unit. Therefore, your numbers look better than the correct numbers.
With a NOI of $2,750, you can only afford a payment of $1,550 if you want a positive cash flow of $100 per unit per month. That means the maximum purchase price would be about $230,000.
Good Luck,
Mike