I am buying the following 10 unit building with an all cash offer:
Gross revenues: $41,185
Vacancy loss (5%): 2,059
Effective gross: 39,126
Prop taxes: 5955
Property Management: 2000
Capital reserve: $4118
Total exp: $17,188
purchase price: $155,000
cap rate: 14.15%
After I purchase the building I would like to refinance and pull 80% out. Prevailing cap rates in this area are 9-10%. Can I use a 10% cap rate to value this property (i.e. $219,380) and get 80% of that value (which would be $175,504) out of the refi? Or can I only pull out 80% of the original purchase price?
Any advice from bankers out there would be much appreciated.
It would be 80% of the appraised value…not purchase price.
Thanks Patti. Would the appraised value usually be based on the NOI? Would it be reasonable to use a 10% cap rate in this case?
Lenders will use an official appraiser (certified MAI appraiser). The appraisal uses a lot of different information to come up with the value.
If you’re just looking for an estimate, then use the local cap rate for that type of building. Just be aware that cap rates & appraisal values usually do not match.
INCOME & EXPENSE DATA
Vacancy & Collection Percentage:
Annual Gross Income (PGI):
Other Annual Income:
TOTAL ANNUAL GROSS INCOME:
Vacancy & Collection amount:
EFFECTIVE GROSS INCOME (EGI):
Real Estate Taxes:
Flood Insurance (if applicable):
Res. Mgr. salary:
Repairs & Maintenance:
Interior & Exterior Dec:
Cleaning Expenses & supplies:
General & Administrative:
Professional Fees (Legal & Audit):
Expenses as % of EGI
NET OPERATING INCOME:
ANNUAL DEBT SERVICE:
Do not make all cash offer. put 10% or 20% . Keep the rest in an interest bearind account. Let that money work for you. If you need it… it is liquid! LEVERAGE. USE OPP, Are you down with OPP? Now you do not want Uncle Sam to have your money do you? TAXES… Tax- write off, if in LLC… business expense to write off… It is not what you make, it is want you keep. If you do not want to keep it … give it to the Nigerian Scam… Snob story.
Even in an all cash purchase you should have an appraisal conducted. You tell the appraiser what your intentions are and have them estimate what value would be used when you attempt to refi.