If your overall return is higher than your losses on this property than it’s just a matter of accepting the actual returns.
Unless there is something severely wrong with the location, like it’s becoming the destination of uranium disposal, I don’t think the long term risks are very high.
A 1% drop in population over 10 years is statistically nothing. That stat could change on a dime, in a town that size with the arrival of a new liquor store.
What this tells me is that the population is enormously stable, especially considering it’s total population numbers.
It’s clear to me why the property hasn’t been selling.
The CAP Rate is something you find in an appreciating, ‘destination’ location, like Newport Beach, CA, but not some half-horse of a town with a Sinclair station …and surprisingly, a 10-unit apartment building.
Meantime, the current GSI is $57K. The EXPENSES will be 50% of that, or $28.5K. The NOI will be $28.5K.
This means the CAP rate will be 6.3%. What?
I’m betting you can find the same deal at a 10 CAP if you’re willing to look a little further upstream from this over-priced ‘gem.’
That owner is really proud of this project, and you can’t afford to be that proud to own it.
CAP Rate, of course, represents the cash on cash return of an all cash purchase. Does 6.3% excite you?
Meantime, all the rental increases won’t give you a profit. You’ve given your future equity appreciation to the seller.
That is to say, if the current market CAP rate is say 10%, then the value of your newly purchased building with the higher rents is (drum roll, please) $300K. If the CAP was 9%, the value would be $333K.
Just for giggles, let’s say the CAP was 7%, the value would be $428K. That’s after raising the rents.
So, in order to break even, adjusted for inflation, you would need to find a buyer willing to buy at a 6.3% CAP …assuming the higher rents, despite the market CAP rates being 10 or higher.
Somehow the price you’re agreeing to pay here, and it’s consequent return, sucks like a pube-infested shower drain, as far as I’m concerned.
Notwithstanding, and theoretically speaking, you could agree to pay $450,000, and overcome the negative equity, by dividing the price by 360, and offering to make ‘annuity-style’ payments to the seller, for 30 years, at NO interest. This would provide you the extra cash flow, that overcomes the negative equity you purchased.
What you’re about to do:
“INVESTING IN A LEMON, CONVENTIONALLY”
$450,000 Price
<$ 90,000> Down
$360,000 Balance Financed (6%, 30-year, Due in 7)
$ 30,000 NOI
<$ 25,900> Annual Payment
$ 4,100 Pre-Tax Cash Flow
4.5% Cash On Cash Return
What you might consider doing/offering/negotiating:
“TURNING A LEMON INTO LEMONADE”
$450,000 Price
<$ 90,000> Down
$360,000 Balance Financed (0%, 30-years, Principal Only)
<$ 12,000> Annual Payment
$ 30,000 NOI
<$ 12,000> Annual Principal-Only Payment
$ 18,000 Pre-Tax Cash Flow
20% Cash On Cash Return
============================
This just illustrates the fact that we want our price, or our terms as investors, and we don’t care which we get. The more extreme the price, the more extreme the terms, and visa versa.
Of course, many sellers want their price AND their terms, and we call these sellers “insufficiently motivated,” and move on to more sensible deals.
To put a nose on this, this property is WAY over-priced for it’s location and demand.
You need to find out what is the market cap rate for small, older units in this and nearby half-horse towns.
Finding that out first, will give you the ammo you need to pull the trigger on a deal, where the seller isn’t taking all your profits with him.
:beer