I am looking at a 15 unit apartment building.
The gross Operating Income is $124K. The Total Operating Expenses are $54K. With the NOI $70K and a sales price of $1,100,000, I don’t think this is a good deal. But maybe I am not looking at this right.
Thank you in advance for your help.
The cap rate is only 6.36. You would need $400,000 down to even qualify for a loan on the balance. And then it would cash flow. Not good, unless you have deep pockets and have reason to believe that it will appreciate greatly in the near future.
This is way over priced. Paying $74,000 per unit is crazy.
Your mortgage will be around $8,500 a month. Your monthly NOI is only $5,833. That’s almost $3,000 a month negative cash flow. One deal like this is all it takes to distroy yourself.
He probobly doesn’t have to worry, would a lender really finance him on this deal?
I have two thoughts on this post.
In reading the subject “new to investing in apartments” i would have to agree with all the posts before mine. This might not be the best deal since it will probably take some money to get into, and this is not the best way to make a quick return.
However, without knowing the metrics of the area in which you are investing, if you factor in a longer hold term, say five years, the numbers get much better. By improving rents by 4% per year, which isn’t out of line for most markets, and increasing expenses by 2% per year (in line with inflation) and setting an exit cap rate of 7% (higher than where you purchased) you can expect a return on your money of over 20% per year after selling in the fifth year. If, during that time, you are able to lower your expenses from its current state of almost 45% your returns will get better.
By improving rents by 4% per year, which isn't out of line for most markets, and increasing expenses by 2% per year (in line with inflation) and setting an exit cap rate of 7% (higher than where you purchased) you can expect a return on your money of over 20% per year after selling in the fifth year.
Rents increasing by 4% per year and expenses increasing by only 2%, is a very optimistic scenario. Real inflation is NOT 2%, that is the government’s CORE CPI number. Unfortunately, the government is cooking the books. Gasoline prices have dramatically increased over the past two years and everything that depends on petroleum has also. Plastic pipe is nearly double what it was two years ago, groceries are higher, copper is out of this world, almost everything is significantly higher. Unfortunately, in the real world we have real expenses, not the government’s new math numbers. Moreover, we’re teetering on the verge of a recession. Rents can and do go DOWN as well as up. Taxes, insurance, fees, and expenses can and do go up faster than rents in many areas.
In my experience, the most optimistic scenario is not normally the one that occurs!
Mike
I completely agree. That’s why i prefaced the post by saying i didn’t know where they were investing.
When you analyze an apartment building, such as Zoemom4 is, you take current numbers and plan your income and expenses over a certain hold period. Actual numbers may be more or less, and you adjust as the changes come in.
Though things like petroleum and energy may increase in price, i doubt any property owner is replacing their plumbing every year or buying their tenants lettuce.
If you knew the cap rate, you could estimate value using the income capitalization approach—let’s assume a 10% cap rate (NEVER EVER assume what the cap rate is) for the sake of showing you how to compute this:
V = NOI/R
V = Value
NOI = Net Operating Income
R = Cap Rate
70000/10% = 700K
The cap rate would need to be =< 7% to justify the value and even then on slip on actual NOI or NOE, and this would require a modification to the cap rate to make the numbers make sense.
Regards,
Scott Miller
You can never go wrong in property. If you have a small amount left over stick it in shares if your feeling confident to.
When you are thinking about buying and selling apartment buildings, remember that you should always take the long view of things. For instance, many experts believe that the housing markets tend to move in seven to ten year cycles. There are highs, there are lows and there are places where it seems as though an equilibrium has been reached, but it is important to remember that things will always change. Remember that you should always plan as well as you can and that you should always take new information into account.f you want to be invested in the buying and selling of apartment buildings, take a moment to think about how to learn about the areas that you are thinking about working in. Make sure that you tour the area extensively and that you know who lives there and who is likely to rent from you. Read up on apartment investment publications about that area in specific and that you know what kind of services infrastructure is present and what will be going up in the future. The more time that you spend understanding the area, the better off you will be.This might be the best time for you to get involved in investing, so don’t move forward without the right property investment advice!