Is this a good deal - $5M income property

[David Besins]

Quick background: I have decided to start building a portfolio of rental properties (multi family) mostly in the Boston area for now. After acquiring a couple of 6 and 7 family - 600K properties, I realized it is quite a bit of work and decided my next purchase would be a larger project (easier to finance/manage etc).

My goal when I started looking for those was over 20% return (including principal payment) on a 20% down loan  while being very conservative with vacancy and budgeting repairs. I would probably exceed those targets.

Fastforward 3 month, we found a decent buy and here are the numbers:

List price: 6M (I know they will sell for 5.5)

Max purchase price: 5.25M

rent: $614K/year

expenses: 150K ( I am budgeting 160K)

For this deal I am trying to get to 10% DP / 80% bank (5year/25 year amortization / 4.875%) / 10% owner (matching bank terms). Using these numbers I get:

CoC: 65K (12.4%)

Return: 163K (31.1%)

The building is close to Boston and a solid brick building.

Do you guys think it is a good investment? - Please give your opinion 

[Darrell Lee]

9 Times Gross Rent Multiplier? 10% DP... I agree with the others that your expenses are way low and I'd expect you to find that your expenses are at least $100k/yr low. That large of a building I'd estimate 40-45% expenses at best. At a 9x GRM and 10% down, I doubt you will be breaking even.

As a life long Los Angeles person now living in Vermont, I've learned a lot of expenses in the NE are very different. I turned off my pilot light to my L.A. furnace 10 years ago and the few times it got really cold, I'd use a $15 space heater at my home. Fast forward to today, I purchased a couple obsolete municipal buildings with underground oil tanks... one is 10,000 gallon the other is 15,000 gallons. I bought a 12,000 s.f. mothballed school and it took at least 4,000 gallons of oil to keep it from freezing up. At today's prices of almost $3/gallon, that's $12k maintaining a temperature of about 50f degrees so it doesn't freeze up. Your heating expense is way low. In 60 years in L.A. I've never had a lawn... In Vermont, New Hampshire and Ohio, I now own several lawns with expenses I hadn't included.

But I bought REO and municipal surplus auctions, paid cash and paid a fraction of the median average prices. After rehab of a duplex for example, the GRM is around 2.5x...

That's a big building you are looking at... Can you afford going $5-10k per month out of pocket if things go wrong? I prefer smaller investments to be more diversified. Boston, like LA, NY and DC the prices have gone sky high. But you said Boston Area so it depends a lot on the area. In Boston proper 9x may not be too bad but if you are 30-50 miles away, you could be overpaying...