Rate My Deal

[Blaine Johnson]

I would love to hear comments and suggestions and creative counter offers on the following owner financing deal-

6 unit (possible 7th) multi-family property in an older part of community. Old, not run down or "the hood", in a college town of approx. 60k population. Out of state for me but with many family and friends, and frequent visits. To be professionally managed. This is intended as buy and hold, till death do I part, (or outrageous offer) and will have 1 unit as a part time residence for myself in the future.

160,000 purchase price

20k down

6% Interest

10 yr. Balloon for balance remaining

No prepayment penalty after first year

Cap rate at 18 or better...yes 18.

BRRRR?

[Account Closed]

Originally posted by @Matthew Schroeder:

@Blaine Johnson  I thought I would let you off easy on the cap rate as I just saw someone else on BP make the EXACT same error a couple of days ago -  I am actually a little surprised that @Account Closed didn't catch the issue before me in his earlier post, as he usually has a very keen eye for such calculation issues.

I hope that my comments were helpful!  In the event that you decide to still move forward with that investment, make sure to check on those utilities to see who pays (owner or tenant) - that can be a big swing factor in the economics of the project!

@Matthew Schroeder See it really doesn't make ANY difference if you calculate the NOI correctly or incorrectly because if you use the cap rate incorrectly you still end up with a USELESS number in both calculations. Now if @Blaine Johnson had actual cap rate comps from closed sales of similar properties in the same market around the same time then IF he had a correct NOI calculation then he could arrive at the market value for the property.  

As long as anyone is just dividing NOI (correct or not) by some asking, guesstimated, hoped for price then you have NOT created a cap rate. Think about a 1000 sf house that they are asking $100,000. That would be $100 a SF. Yeah! But what if you knew a SALE of a 1050 house sold for $84,000 and a 980 house sold for $80,750. Wouldn't it be better to use THOSE $ per SF to come up to an offer of say $81 a SF times 1000=$81,000? See, just saved yourself $19,000 by using correct numbers properly.