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Updated about 1 year ago,

User Stats

13
Posts
7
Votes
Cody Warhurst
  • Investor
  • Pennsylvania
7
Votes |
13
Posts

How to estimate the amount of debt a property can support based on desired cashflow?

Cody Warhurst
  • Investor
  • Pennsylvania
Posted

Hello BP,

I think I have a simple calculation question that I'm a little stumped on. I read another (quite old) post on BP where a user stated they back-calculate the debt a property can support based on their desired cashflow;  if the deal can't hit the cashflow threshold, then they would walk away. 

My question is, how can I quickly estimate the amount of debt a property can support based on my desired cashflow so that I can approximate a reasonable purchase price and thus down payment amount?

For example: 

My cashflow target is $200/mo*unit 

The property is 9-units with a listed NOI of $84,000/y

Therefore, I would have $21,600 cashflow/y and debt coverage of $7000/mo (NOI/12mo)

So if I subtract the cashflow target from the NOI (Ignoring taxes or including them for simplicity...), then I should have $64,400 in debt that the property can support per year.

In this example, pulled from an actual posting on LoopNet, the asking price is $1.2M. If I do this calculation....the property is overvalued by 100%. As in, their asking price is 2x what its worth. Their materials state it was purchased in 2020 for $500,000. So...does that mean my conclusion is correct? They basically bought the place for $500k, maybe did some updating (nothing of note in the listing), and they now want over 2x their purchase price for this property??

So how, with all of the above info, do I get to a purchase price that would satisfy that? I know I'll need to make an assumption on the rate I'd be able to get on the loan...or is that it? Do I just keep plugging in these numbers in a mortgage calculator using trial and error with reasonable assumptions on the mortgage until I hit $64,400?

I've been have trouble conceptualizing, as a newbie, how any MF property listing I've seen can possibly have a  positive cashflow without a huge down payment. Now, it's probably a mix of my bad math, bad deals, and my misunderstanding of financing--because surely some properties must have positive cashflow from day 1, right? 

Very confused.

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