I have a potential deal, 20 unit complex in small town in Texas. Asking price is $240,000, total potential rents is $75000 at full occupancy. Currently has 6 vacancies, taxes $4000, Ins $4500, PM $7000, utilites $10,000, $6500 repairs. Recently remodeled 18 of 20 units.
Looks like great DCR, even at 20% vacancy the DCR is 1.29.
What should I offer on this prop?
Hi sandyb,
If the dscr is 1.29 at 20% vacancy, it looks like a good deal.
Do you know what it will appraise for?
Also, you can;t go by full occupancy value. You have to take a historical rent roll to see what you can expect.
Also, keep in mind that lenders escrow estimated repair needed until they are completed, often at 1.5% of the estimated cost of repairs and then give you a time fram of how long you have to get the repairs done in order to release the funds after the repairs are inspected and signed off on (assuming you are referring to repairs that would affect the appraisal)
Based upon what you state here, I have a feeling you are not going to be in a great negotiating position. Maybe 10k or so difference but the deal looks really good.
Curious, why 20 vacancy and for how long have they been vacant?
I would also make sure that if you put a binder and / or down paymnet on the property, that you have an escape clause stating that if the property does not appraise for the amount orf the selling price, that you are entitled to a full refund of your earnest money deposit if you choose at that point to walk away from the deal.
First step is to find out what it will appraise for.
The appraisal wil lcost you somewhere around 2k or so.
Good luck with is.
Jeff
What is dscr? and pm?
Debt-Service Coverage Ratio - DSCR
In corporate finance, it is the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments.
In government finance, it is the amount of export earnings needed to meet annual interest and principal payments on a country’s external debts.
In personal finance, it is a ratio used by bank loan officers in determining income property loans. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.
In general, it is calculated by:
Net Operating Income / Total Debt Service =
A DSCR of less than 1 would mean a negative cash flow. A DSCR of say .95 would mean that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean the borrower would have to delve into their personal funds every month to keep the project afloat. Generally, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income.
Hi Campbellgroup,
The basic formular for determining DSCR (debt service Ratio) is teh NOI (net Operating Income) divided by gross operating expenses.
Although, as IndyBruce properly explained about what the ratios mean, a debt servicing ratio of 1.0 is not a bankable or lendable deal as there is no profit. it is break even and does not account for emergencies and reserves. Lenders like to see reserves and so do you as the owner.
Generally, a DSCR of 1.1 may possibly be acceptable (10% profit margin and just enough for reserves), however, being in the lending arena, I can tell you that we look for a DSCR of at least 1.15 so that we see that the borrower is not only able to maintain reserves but also is making a profit.
A DSCR of 1.25 makes us really happy. 
Jeff