Analyzing commercial properties

[Perez Fernando]

Does anyone have any work sheets for analyzing commercial properties?

[Jon Holdman]

Oh, oh, good one, I love math. I have to be a smart aleck on the obvious ones.

60 units - number of tenants to give you trouble.

asking price: 4,100.000.00 - what someone dreams of getting for the place.

Cap Rate: (Potential) 8.77% - NOI (below) / asking price - the return you would get if you paid all cash. Potential means they're calculating a "proforma" number that assumes things will be better than they are now. You can use words like "pretend" or "made up" instead of proforma for all you really care.

Price paying (Per Sq. Ft.): $48.45 - purchase price / total square feet. Sometimes broken down by gross square feet and rentable square feet that deducts our common areas. Not sure which this is.

Price per unit: $68,333.33 - average cost for each of the 60 units.

Gross Rent Multiplier: 5.96 - Total annual rent / purchase price.

Expenses per unit: $5,475 - Total expenses / # of units

Expense to Income ratio: 47.73% - expenses / rent. Expenses / total scheduled rent is the "50% rule" that gets beat around here a lot. Not sure if this is total scheduled rent, or rent after deduction for vacancies plus addition of other income (laundry, utility billback aka. RUBS, or something else.)

Income per unit (Monthly): $955.93 - average rent per unit

Average Sq. Ft. (Per Unit): 1410 - average unit size

Debt Service Coverage: 1.52 - annual debt payment (P&I) / NOI. Lenders will want to see this over 1.2 or some such. You have to take this with a grain of salt because its probably based on a high down payment, long term, and a unrealistically low loan rate. Aka DCR for Debt Coverage Ratio or DSCR for Debt Service Coverage Ratio. This will be a key number to the lender.

Cash Flow (BT): $122,793.41 - Total rent less vacancies plus other income less expenses less loan payment. Annual number. BT is before tax.

ROI YR.1 (BT): 14.97%. - Return on investment. Cash flow / total cash invested, I would guess. Who knows exactly how they're calculating this. Might be "total return" / total cash. The total return value includes the principal paydown included in your payments.

A key number that's missing is NOI - net operating income. They also don't break out the details of the rent, vacancies, and other income. Nevertheless, we can do a simple analysis with some assumptions.

Total scheduled rent: $687,900 (annual, I'm backing this out of the quoted GRM)
Total expenses: $343,950 (using the 50% rule, which includes vacancies)
NOI: $343,950

Asking price: $4,100,000
Assume 100% financing. We can't actually get this, but it allows to evaluate the deal. Assume 7% with a 30 year amortization.
Payment: $327,328 (annual, $27,277/month)
Cash flow: $16,630 (year)
Cash flow/unit/month: $23
Cap Rate: 8.4%

Since that cap rate is pretty close to what they quote, I think these calculations are close. Doesn't seem like a great deal to me. Only $23/unit/month cash flow. MikeOH's goal is $100/unit/month. So, lets see what it takes to get there.

Price: $3,400,000
Payment: $271,443 (same assumptions)
Cash flow: $72,516 (annual)
Cash flow/unit/month: $101
Cap Rate: 10.1%

Yea!

Now, put in the down payment. Assume 20% down, and 3% closing costs

Price: $3,400,000
Down payment: $680,000
Closing costs: $102,000
Total cash invested: $782,000
Payment: $217,154
Cash flow: $126,805
Cash flow/unit/month: $176
Cap rate: 10.1% (not affected by financing)
Cash on cash return: 16.2% (cash flow / cash invested)

So, you can work through whatever numbers and assumptions you want.

Jon