What Am I doing wrong on this deal???

Here is my problem,

I am looking at a 6 unit MF investment,

Current monthly rent is $2,300.00.

This property is worth 112k, this is county appraisal, This is possibly 15% low.

I can pick this property up around 89k

This is my problem, I am figuring this with the 2% rule,

112k x 2% is $2,240.00, so this is a good deal. But I cant get the numbers to work if I want 100 per unit.

89k @ 7.9% = $845 mo.

2300 / 2 = 1150 - 305 cash flow.

So I dont know what I am doing wrong here. This property will cash flow, but I cant get the numbers to work out to 100 dollars per unit.

Any advice would be great.

Thanks

One way could be to make some upgrades and raise the rent with 50$ per unit, this would give you the extra 300 per unit…

Not sure what it looks like though. If you are picking it up at 89 it sounds like a great deal, providing it does not need any repairs.

If it needs any major repairs you might need to pick it up cheaper then 89

Just my 2 cents…

Your assuming that you have to get $100 a unit. Why? The rent for your place is roughly $400/unit. You want 25% cash flow? Unless you really have a sweet deal, 25% cash flow won’t happen unless you have a real low mortgage payment in relation to rent receipts.

While many people start looking at per unit cash flow, it depends on the market. Some areas $100/ unit is high. For others, $100/unit is very low. In some areas investors won’t look at a deal unless it makes at least $100 a unit, or $250 a unit. In other places $50 a unit is fantastic. Part of it depends on the over all numbers. If you buy a 20-unit for $5,000,000 then $100/unit is very weak. But that is not what you are looking at. You are looking at an $89k, 6-unit. Different numbers, different circumstances, and a positive CF of $305 is nice.

I know a lot of people who would kill to get a 13.26 positive cash flow. That equates into a great investment, assuming all of your due diligence shows that the building and all of the rental contracts/tenants are good.

As far as the county appraisal - I would put almost no stock in it. The best way to determine the value of the property is to check out the rental rates for similar apartments in the area you are buying in. Are the rates for the apartments at market? A little high? A little low? At market, you have a good investment. Above market, I would be worried (the seller might be playing games with the numbers or the rental contracts to pump up the value). Or they me be a little low. If they are low, you have a potential home run!

Things like the 2% rule and a set amount for unit are only screening tools. You have to look at the details to see.

<<This property is worth 112k, this is county appraisal, This is possibly 15% low.>>

If you are going to be an investor, get this out of your head!!! See a priest and get an exorcism! What the propertry is WORTH and what the county TAX APPRAISAL is are in now way tied to one another! They may be exactly the same, they may be off a little, or they may be off dramatically, but know that they are derived differently and they don’t necessarily correlate!

Keith

maybe i am crazy and if so i will get over it but from what i read you said…
mtg payment = $845 a mth
present rents = $2300 a mth

in the lil small town of 6 million i live in called houston that leaves $1455 (minus exp. & maint)

that IMO (possibly crazy one) is a pretty good deal especially if you can do this deal without putting a huge down payment on it… maybe 5% with a seller 2nd of 5% would make it a bang up deal!

Also as one poster said, NEVER look at the tax districts estimate as an indicator of value as it is NEVER right IMO. That said, multi family properties are valued based on the cash they generate!

txshortsaleking,

Throughout the United States, operating expenses run 45% to 50% of the gross rents. Therefore, with gross rents of $2,300 per month, the operating expenses would be $1,150 and the NOI would be $1,150. $1,150 - $845 = $305, which is too low in my opinion for a 6 unit.

TxNoobInvestor,

You aren’t doing anything wrong. You just need to figure out what price you can pay to get the $100 per unit per month cash flow. I don’t know where you came up with your mortgage numbers. I just closed on 11 units on Friday with a commercial loan and the rate was 7.25%. If you could get the purchase price down to $89K with a 30 year term and 7.25% interest, the mortgage payment would be $607. That gets you very close to the $100 per unit per month you’re looking for. $82,000 would just about do it!!!

Good Luck,

Mike

Mike,

Loan term is 15 years @ 7.9% this is with a small local back. I can get a secondary loan @ 6.2% for 15 years, But I kinda wanted to keep everything with the bank.

Thanks

Mike,

Forgot to add that the bank will not go more then 15 years on investment property for some reason. I might need to look into another bank.

Thanks