New Deal Analysis

[Roig V.]

Hello All - First off, sorry for the long post but I wanted to give sufficient context here. I am considering purchasing an 11-unit mixed use (10 residential and one street level bar/restaurant unit). The property is in average quality due to some recent capex improvements. An inspection is schedule for next week so we will have a better handle on the actual shape of the property at that time. The property is located in a B- area, not bad, low crime, directly across the street from the police station and near local parks. I don't think there is much downside risk with the area however I think material upside potential in the form of ability to increase rents or overall neighborhood improvement is probably unlikely. At my purchase price, the GRM as well as $/unit (comparing apples to apples in terms of LL expenses) is right on par with the area, maybe about $5k below the norm.

I will caveat this with the fact that my goal for real estate investing is to build a large buy and hold cash flowing portfolio for the long run.  I currently own 13 units across 3 multis (2 4's and a 5).  I recognize that long term appreciation is unlikely with this type of property however the cash on cash returns seem strong (for my area) and given the fact that this acquisition will double my units and allow me to begin generating enough free cash flow to begin funding the acquisition of additional properties, it is attractive. 

One issue giving me some concern is the limited opportunity to force appreciation with this property.  The tenants cover most expenses so there is minimal room to create operating efficiency, and the likelihood of materially pushing rents is probably low. 

Capital is not a concern, and the $120k downpayment would be diversification to an overall portfolio heavily weighted in the stock market. 

Bottom line - Is this a good deal, or one that does not offer sufficient upside? I do feel that downside is minimal as this is a relatively urban area somewhat near colleges so I do not see a circumstance where apartment demand decreases substantially.  Thank you for your insights!

My underwriting numbers are as follows:

Purchase Price: $600,000

INCOME:

Gross Income: $94,032

Vacancy: 5% (property has historically maintained strong occupancy).

EFFECTIVE GROSS INCOME: $89,330

EXPENSES:

Property Management: 7.5% = $6,700

Insurance: $5,112

Maintenance: 12% = $10,720 (I will likely modify this number after inspection one I have a better idea of the actual shape of the property)

Taxes: $8,568

Trash: $1,085

Water/Sewer/Common Elect: $6,910

TOTAL EXPENSES: $39,094

NOI: $50,236

Cap Rate: 8.37%

Debt Service: $33,672 (5 yr arm - 25 year am, 5.0%)

Net Cash Flow Before Taxes: $16,564

Cash on Cash (Assuming 20% down): 13.8%

ROE (NCF + Princip paydown): 22.1%

DCR: 1.49

Debt Yield: 10.5%

Using 50% Rule: $83.28/unit/month