spoke to my advisor and he mentioned the following:
to get the cap rate of this property get the figures:
$50 per unit = $300mth = $3600year
budget = $500 year
misc = $500 year
repairs = $2000 year
water = $800year
taxes = $2000year
heat = ??? est. $3600 (six months)
insurance = $2000year incl liability
this all adds up to about $15k annually
mortgage on a property like this is $2850month = 34200year
So 15k plus 34200 = $49,200 annually
Rent roll = est. $72,000annually
net = 22,800 or $1900month cash flow
how’s my math so far?
did i miss anything?
what would be my cap rate?
<i myself don’t know how to figure that out> ???
You haven’t posted enough information to determine IF this is a deal. How many units does this building have? What are the actual expenses? What is the actual insurance expense? What are the actual taxes? What repairs are needed? When are the leases up? Who pays utilities? Who maintains common areas? Are there any assessments by the city or county? Are there any pending liens or lawsuits? Is their exposed lead paint? ETC, ETC, ETC.
In my opinion, cap rate is meaningless. What matters is the actual cash flow and sales prices of similar buildings.
You need to do more due diligence to determine whether this is a deal or a dud!
Where are you finding these deals? Looking for a partner? I am not interested in such a big unit by myself but would not mind partnering with someone on this. I really like the last deal you posted. Is that still available? Do you mind sharing where you find them if it is online. Feel free to email me. Thanks
Go with the conventional. The rates are low NOW and the Feds are go to keep raising the rates in order to keep inflation in place. Who’s to say what they will be six months from now. Have the owner show you the lease and the rent roll on paper ( the MLS has this.) If you can do it yourself go for it if you need some $ help go with a partner.
Cap rate is the rate at which you discount future income to determine its present value. Generally the cap rate is used to determine the relationship between a property’s value and its NOI (Net Operating Income)
Cap Rate = NOI (annualized) / Value
The NOI = Gross Scheduled Income - Vacancy and Credit loss - Operating Expenses.
You said they were offering at 450k. If you use a cap rate of 10%, that means you need an NOI of 45k to get a cap of 10%
You indicate a GSI of 72k. Take away 15k for expenses you get an NOI of 57k. Based upon that, your cap rate is 12 2/3%. That is a decent cap rate.
Something else you will want to compute for financing is your Debt Coverage Ratio (DCR). The higher this is the better. Basically, this is a general measure of the properties ability to pay for itself. to put it simiply, if you make in rent the same as you spend on the debt for the property then it is a wash with a DCR of 1.0.
Generally banks will look for about 1.25 or better. Of course, each lender/investor has their own requirements and may adjust up or down from there.
You can compute the DCR = Annual NOI / Annual Debt Service. So if you have an annual NOI of 57k and you want a DCR of 1.25, you would want to get financing with a debt service (P&I) of $3800 or less per month.
At the end of the day this deal looks like it would qualify for conventional funding for sure. It sounds like a home run deal. I do think however, that you should look at some of the national lenders vs. a local lender = it will save you sometimes up to 1% on the rate of the loan.