Check my work

[Tyler Kesling]

One week into my journey and I'm starting to analyze deals. I found 80 units / $5M / 95% occupancy / 6.11% cap (claim) / $305K NOI / also included in the listing is comps stating we can get an extra $200+/ month. I found an ad for the complex for vacant units at $875. My calculations say that this complex should be getting closer to $400K NOI at 95% creating a property value of $6.5m.

I buy the property with a DSCR loan at 7% for 30years for an annual payment of $300K. 20% down is $1M from investors.

Increase rent (value add) over then next year to $1150/m creating a new NOI of $524K. This allows me to pay investors around 22% return ($524K-$300K=$224K).

After "x" number of months/years I sell/refi the property at a new value of $8.576m ($524 NOI / .0611 cap). Pay back the investors their $1m and bank $3.5m.

Just the basics but what did I miss? 

[Greg Scott]

The big-picture idea is correct.  I'll point out some areas where there are potential pitfalls.

The 6.11% cap rate is absolutely correct if the price is $5M and the NOI is $305K. The important question is "Is that NOI real?"

How do you determine the property should have an NOI of $400K without raising the rents? It is usually dangerous to assume you can cut costs. It is much safer to assume the seller has been cutting back on expenses to boost NOI prior to the sale.

"DSCR loan" is a term used in single family. Ignoring short-term bridge loans, most commercial loan sizing is limited by DSCR, but they are not called DSCR loans. Please work with an experienced lender to help you understand the right loan products.

There is an operational cost to raising rents that does not seem factored into your process.  To truly achieve higher rents, you often have to spend a significant amount upgrading units.  Even if your units are in great condition, most residents won't be able to afford a $200/mo increase in rent.  This means they will move out.  If you want to turn the property in one year, you are going to experience very high vacancy and much higher unit turn costs.   Either way, you had better have much more cash raised up front. (Many syndicators are selling at a loss right now because they did not account for these things.)  

On the typical value-add I've seen, people are pouring about $10K+ per door into upgrades. In your 80-unit example, that would be $800K. You will also have sizeable closing costs and working capital needs. I suspect you will need to raise a little over $2M from investors to properly execute this deal.

As a side note, 12 months is never going to be realistic on a full turnaround.  The best I've ever seen is about 18 months.  It will take you a month or two to get your feet under you.  Even if you turned 100% of the units in 12 months, the bank is still going to want to see a solid trailing 3 months of financials before determining your loan size.

Food for thought...