After reading a lot of these posts, I noticed that multi-unit properties are the way to go. I’ve looked at a few, I liked a couple but this one in particular sparked my interest:
Financial Summary Proforma
Year: 2005
Scheduled Gross Income: $124,560
Vacancy: $6,228
Laundry: $6,116
Effective Gross Income: $124,448
Maintenance: $2,700
Taxes: $18,661
Insurance: $3,171
Other Expenses: $19,811
Total Expenses: $44,343
Net Operating Income: $80,105
Expenses/Unit: $2,771.44
Cap Rate: 10%
Unit Mix Information
2 bdr 1 ba with underground parking
No. Units: 16
SF: 1,032
Avg. Mo. Rent: $649
Debt & Equity Information
No Debt & Equity Information Provided
???
Looking for some advice, opinions and guidance on this one.
That is a pro forma mostly likely written by the seller- Not the actual numbers. I’d imagine that the income is lower and the expenses are certainly higher.
You are also forgetting about a lot of operating expenses including a reserve for replacements. This building will deteriorate over time and you’ll need some money set aside for big capital improvements. Your operating expenses should run about 40-50% of the effective gross income. By your cap rate, it appears the asking price is $801,050. If the “projected” EGI is close to reality, your cap rate should be about near 7.76. Adjust that asking price if you require a better return, verify the current numbers, add the expenses the seller forgot and see if it still works out.
I kinda figured that his numbers would be inflated to get a bite. I have the reserves for a project this size, however I definitely want to be careful. I will get the financials and take a closer look.
If this is a 1st., what experience do you have managing tenants, financials, and property management? (suggest www.socrates.com)
Will you require a licenced Property Management company to manage the tenants and building for you?
PMs charge ~ 10% of income. Is that in the financial plan if you don’t live in the area?
Do you live in the same area as the building you are planning to buy? How often do you plan on inspecting your property?
What is your plan for problem resolution?
If my math is correct, is ~ $51k / unit = value of the 2005 bldg? Does that sound like a quality build for the geographic location?
Will you be getting a prof. Inspection report to find out if the building has any problems?
Why is seller selling it if it is 10% CAP? (perhaps a IRR analysis would give a clearer picture?)
What are the contracts with tenants? 1 year? Month to month? Where is rental deposit money?
What is appreciation rate of multi-units in that area?
DannytheGreat is exactly right. The expenses are low. In reality, the expenses are probably more like $62,000. NOI is about $62,000. Mortgage pmt per year is about $63,864. This one is negative cash flow at 100% financing ($800K, 30yr, 7%), although you probably can’t get 100% for this one. You would need to put money down just to break even. This is a retail deal. You can do better!
I had a brain fart. It was late. Sorry for my error.
NOI / Sales price = CAP rate
NOI / CAP rate = Estimated Market value
What I was thinking:
Since you can’t recoup the interest on the loan until you submit a tax return, you’re out the money for the mortgage payment. That affects the cash flow.
There is also the cost of the loan, down payment, affecting 1st year cash flow.
YOUR Cap Rate
= (0.7 x 0.079836) + (0.2 x 0.132744) + (0.1 x 0.2)
= 0.055855 + 0.026549 + 0.02
= 0.102434 (or 10.2434%)
And, finally, using different NOI’s …
YOUR Purchase Price
= NOI / YOUR Cap Rate
= $62,000 / 10.2434% = $605,267
= $70,000 / 10.2434% = $683,366
= $80,105 / 10.2434% = $782,014
So, to be safe, you’d probably want to go with the lowest price. However, if your due diligence shows that something a little higher would work, consider it, also. But DON’T base your decision solely on YOUR cap rate (or any other cap rate calculation) alone.
I’m not sure if your trying to set a record for asking the same question the most times, but your definitely leading the race. The MLS and foreclosures are the most crowded place to look for deals.
After reading your posts, your not ready to make any big investments just yet. There are no hidden deals and there are no secrets. Join a REI club in your area and see if any landlords are trying to get rid of some properties. Get off your computer and drive around for a few hours. Forget the stupid lists that everyone and their uncle are looking at. The best deals come from owners who want to sell; but either don’t know it yet or have yet to get the ball rolling to do so. You’ll pay top dollar for deals that everyone knows about. Tomorrow (Saturday) will be a good day to look for apartment buildings because you will be able to tell right away the occupancy by looking at the parking lot. Weekdays most people are at work so the parking lots are already empty. Often the owners don’t have the creativity, energy, marketing skills to attract tenants and thus allow the poor performance of the property.
In a nut shell:
Q: How do you find properties? A: You just do it!!!