Is this apartment deal worth considering? What would you offer?

60 units. Built in 1980. This is in a very good area surrounded by SFRs. Good condition with some deferred maintenance.

Monthly rents ~ $33,500
Tenats pay electric, owner pays water

Seller is asking $2.25Million

Based 7% vacancy and 50% of rents as operating expenses, I am calculating as follows:

Annual Gross Rents=$402,000
Vacancy=$ (28,140)

This is close to actual numbers. Current occupancy is 95%. This is a C Class property, so based on a 9% cap rate, I am thinking of offering $1.85 Million and then spend ~$100K to $150K in fixing deferred maintenance.

What do you think? What would you offer?

Here is how I would evaluate this deal:

Gross Rents: $33,500
Operating expenses (including vacancy) $16,750
NOI: $16,750

Mortgage ($2,000,000, 30 yr, 7%): $13,300
Cash flow: $3,450 per month or $57.50 per month

Personally, I think the cash flow is too low and therefore I would offer less than $1,850,000 (+ $150K repairs). I would prefer to have a cash flow of about $100/unit/month.

Good Luck,


Thanks for your response PropMgr. I failed to mention, I would put 20% down (so 1.85M X .2 = $370K). Then I would try to add the 150K of rehab into the note. So at the most, shouldn’t my note be $1,480,000 +$150,000 = $1,630,000?

I see it like this based on $1,630,000 :

NOI = $201,000/yr or $16750/mth

1,630,000 @ 7% 30 yr am = $130,128/yr or $10,844/mth

Cashflow = $70,872/yr or $5906/mth ($98/unit/mth)

ROI = 19.1% (70,872/$370,000<<<downpayment)

That is a great return on your money.

Be careful rapchik because this scenario can be a bit misleading. 19.1% may be the number on paper that you’re getting on your money but that’s not entirely right. You should factor in an opportunity cost for that money. So it may only be like 10% ROI once you do that. Remember, just because you’re putting money down on a project doesn’t change the quality of the deal (starting to sound like propmgr here). You wouldn’t take a property that is losing money and put down a chunk of money to make it cash flow would you? Even if you do that it’s still not a good deal no matter how you slice it.

My recommendation, even if you are putting money down still do your calculations as if you are financing the deal 100% at the bank’s rate. If you do that you’d be giving your money a 7% opportunity cost which is probably fair. Good luck.

JBaldwin is exactly right. That $370K isn’t free or is it? If you’ve got $370K sitting under your mattress, give me a call, I’ll pay you 2% interest on it!!!


With all due respect, jbaldwin

That is not misleading at all. That is how you calculate your ROI and COCR. ofcourse less closing/soft costs.

20% downpayment is pretty typical in the commercial world and you should analyze deals as such. Obviously if you have the “opportunity” to put down less you will, and the underwriting would be adjusted, inwhich you would have more opportunities for the remaining $$$.

Opportunity costs should not be factored into your underwriting.

Plus it fits the $100/unit criteria.

It’s pretty straight forward.


I don’t think anyone was implying that the DP is free however there is only one way to determine your return on investment and cash on cash return. It’s pretty basic. How much is your money yeilding? It’s a pretty standard way of thinking.

ROI and cash on cash and IRR are all a different beast than CASH FLOW! Sure you want to take these measurements and use them as a tool to compare different properties and investments and make sure they fall within your investment strategy. But whatever you use as your 20% down could have been used for a different purpose or opportunity. And because you’re foregoing another potential opportunity there is a cost associated with that. Therefore, that cost of lost opportunity has to be calculated into your CASH FLOW projections.

Think of it this way. He could take 370k and stick it in a 60 mth CD and get let’s say 7%, but he’s not, he’s putting it towards a piece of RE and earning 19.1% or whatever the # is. So, he’s passing on a 7% opportunity to get a 19.1% opportunity, a difference of 12.1%—which is still good.

The cash flow projections you take to the bank will only be based on 80%LTV, but you should keep a separate worksheet for yourself showing that the deal is actually 100% financed which goes back to your cash flow on the property. Maybe you don’t calculate in a opportunity cost, I do, but if you don’t you don’t have a completely accurate picture of how you’re investments are performing.

I don’t think it’s really necessary, at all. Opportunity cost is something not easily quantivied, basically because there is a plethora of opportunities out there.

Thanks for both points of view. In my situation, I do have the money and it is earning 3-4%. The reason I even am considering buying the apartment is because I am looking for passive losses to offset earnings on my other business (which is currently resulting in me paying tons in taxes). So within that context even if I look at opporutnity cost, I am going to factor in 4% (but hopefully some of this will be offset by tax savings which I will not factor in). Secondly, I already have financing lined up at 5.5% if I can make this deal (i.e. if the seller comes down from his price which I think is overpriced). So I would like to know what you would offer on this deal?

Maybe you should build a carwash to offset your other earnings, I have some friends who have done that, no joke. Back to our discussion though, 5.5% is nice, that’s 50 basis points below prime! You kind of have different goals for your purchase than many of us would here because we are cash flow buyers and you say you are looking for passive losses. So here’s how I see it using a 12 cap.

NOI = 16,750/mth
12 cap = 1,825,000(incl. your 150k) @ 5.5 over 20 yrs = 150,648
16,750 - 12,554 = 4,196 / 60 units = 69.93/unit

A 9 cap would be:
16,750 - 12,802 = 3,948 / 60 units = 65.80/unit

I would set 1,825,000 as the absolute highest I would go. I’m doing my projections on a 20 yr. note though, the other guys are putting their’s on 30’s. I can’t get a 1.8mil deal on a 30 yr. note.

12 cap = 1,825,000 @5.5 30yrs = 10,362/mth
16,750 NOI - 10,362 debt = 6,388 / 60 units = 106.47/unit…this would be ideal: 12 cap on a 30 yr note. 1,825,000 would be the perfect number, I’d try to get as close to that as possible on a 30 yr. note.

One more thing I’d like to add. If you are factoring appreciation, which is something I recommending implementing, 3% annual growth is pretty conservative.

Think of it this way. He could take 370k and stick it in a 60 mth CD and get let’s say 7%, but he’s not, he’s putting it towards a piece of RE and earning 19.1% or whatever the # is. So, he’s passing on a 7% opportunity to get a 19.1% opportunity, a difference of 12.1%—which is still good.

I understand the comparison, I just feel that it’s pretty irrelevent when you do a cashflow analysis. COCR, ROI, IRR aren’t just ratios, they are directly related to your cashflow. The 12.1 number means nothing to me because my return was really 19.1%. It’s almost like saying, I cashflowed $70,000 for the year but if I factor in my opportuntiy cost I really only cashflowed $40,000 on this deal.

I guess it’s good to understand what your average yield for say a money market acct or CD etc but to actually calculate and qauntify it as part of your analysis…I would say no.

JB Thanks. your offer of $1,825,000 is based on $16,750 Monthly NOI calculated by PropMgr. Having reviewed the actual expenses on the property I think the Annual NOI is going to be no more than $175,000 so Monthly NOI of $14,583.

So using your offer of $1,825,000 as a reference point my offer would need to be ~$1,588,000. No way I would get the property for that, that is much less than the current owner paid for it several years ago (and mind you this is a stabilized property with 95% occupancy). I will need to use a lower cap rate than 12%. C Class properties go in the 8-9% range. If I use a cap rate of 9% at Monthly NOI of $14,583, I come up with an offer of $1,944,000 (with $150K for capital upgrades). So the net to the seller will be $1,794,400. I am comfortable with that offer; I know the seller won’t go for that but so be it.

LightBeing, I tend to not include the opportunity cost when crunching the nos. I am looking for a Cash-onCash return of 10-15%. That is as good or better than what most alternative investments have offerred me over the long run. And like you pointed out, this doesn’t include appreciation (and in my case tax savings on earned income).

So then, at a 1,944,000 purchase price it will look like this then:
1,944,000 5.5% 30 yrs = 11,038/mth
14,583-11,038 = 3,545/60 = 59.08/unit/mth…good enough for some, not good enough for others I suppose. But aren’t you wanting a net loss to offset other earned income? If that’s the case these numbers mean nothing really.

JB. I am quite surprised and amused by your statement that I am looking for a net loss. I am not looking for a net loss, I am looking to cash flow with a 10% cash on cash return as I mentioned before, However, I am looking for passive real estate losses via depreciation and interest expenses. So these losses should be enough to write off my net income on the property plus some of my other earned income.

I was a bit confused, I thought that maybe you were wanting to invest in a property that lost money so that you could reduce your overall income level therefore paying less taxes. And, I assumed that you had it all figured out to where this was actually making you more money in the long run. Seriously, I have buddies who build car washes knowing they’re going to lose money but do it because it lowers their tax liability to the level where they actually make more money that way.

Wow, I never thought about doing that. No I am not interested in buying anything that I know going in is losing money. I’ll have to do the math and see if what your friends are doing would make sense fo rme. But I would have a tough time investing in something like that

Also doesn’t include paying off the property by the tenants.