First Potential Rental (Listed at $1mil) at 20 years old

[Kaden Fascella]

Hello everyone!! This is my first post on bigger pockets and I just wanted to pick everyones brain about my first potential rental property.

This property has 2 homes on it, one home has 3 residential rentals in it, the other has 3 residential units and 1 commercial space. As I mentioned in the description, the listing price is currently at $995,000. It was originally listed for $1.3 mil on 07/19 and with-in 2 months they dropped the price 3 times to what it is currently at. All 7 units are currently rented for a total rent of $14,100/month. The total property tax for both homes is $40,099/year, and the one home is in a flood plain, so I need to purchase flood insurance and the listing agent told me that runs about $20,000/year for this home.

I'm someone who struggles with analysis paralysis and over analyzing my spreadsheets. I'm mostly writing on here to see if other people would consider purchasing this property with the details given. If you would consider it, would you offer asking price or throw a kind of low ball offer at like $850,000?? I want to lean on the side of offering asking price cause how could they say no to that; and also when you do the math on the month-to-month income, it only comes out to be like a $500-$600 dollar difference in monthly cashflow. I'm scared to offer something like $850,000 and loose the deal all for a couple hundred bucks more a month, this already seems like a pretty big home run. I'm only 20 years old, never bought a rental property before, have a ton to learn and just seeking some advice from those who are more experienced. Thank you so much for taking the time to read this, I really appreciate it!!

[Neil Schoepp]

Kaden never be embarrassed to ask for clarity. It's the only way to learn. 

I tip my hat to your father in-law. I was the first class hired after the 11th. I still remember my very first day, October 28th. Some really big shoes to fill. God Bless him.

Caps can get complicated but the real "simple" explanation is this.

Commercial property whether it is office space, storage, Multifamily, mixed used, etc. they all produce income. They all have cost to run them which is your operating expenses (OPEX).

You minus your expenses from your income and you are left with your Net Operating Income (NOI) Now here is where cap rates come in. Depending on your market and your asset type there will be cap rate that specific asset type in that market trades at. So a Multifamily in Virginia Beach may trade at a 7 cap where as in NYC it may be a 5 cap.

The formula to find the cap rate is NOI / Value = cap rate. If you know two you can always find the third.

NOI / Value = Cap Rate

Cap Rate * Value = NOI

NOI / Cap Rate = Value

So on your property they are receiving 169,200 in annual rent (14,100*12) from that you subtract expenses for this example we will say they have 50% expenses or 84,600. This leaves us with an NOI of 84,600 ( remember noi=income-expenses)

Now we take that 84,660 / 995,000 = 8.5% or an eight and a half cap.

The cap rate is never really determined until you and the seller agree on a sales price. When using it in conversation it will go something like "Class B properties are trading at a 6 cap". It gives you a reference point.

Lastly if you were to purchase this property all cash for 995,000 and that property returned to you 84,600 annually then the property would return 8.5% annually to you. Is the risk you are taking in investing in the property worth an 8.5% return?