This is supposed to be a good deal, but the numbers don't work

[Sean Price]

I found this 6 unit multifamily.  Here are the numbers:

Monthly income: $5450

Yearly income:  $65,400

Total reported expenses:  $22,900 for the year

NOI: $42,510. He is asking $425,000 for the property which puts it right at a 10% cap rate.

His lender is willing to allow a wrap around, so I could take over current financing for $336,000 at 5.5% interest (the current rate of his loan) for 15 years.

The seller is asking for 20% down or $84000.

I am looking to bring on a private lender for the $84,000 down payment and expecting about 7% interest (15 year am but ballooned in 5).

With these two debts, the debt service would be $3590 per month or $43080 per year. This puts the property at a negative cashflow (NOI is $42,510).

So here is my question....it is my understanding that a 10% cap rate is a good rate to buy a property at....but these numbers don't work, is it because of the 15 yr loans versus 30 year loans?

Also, it is my understanding that in a multifamily, it is best to assume a 50% operating  expense budget, so 35% seems very low to me....there are no calculations for vacancies or capital improvements, but there is property management in there.

The possibility for improvements is to have rents increased to catch up with current market by about $500 per month total (that's after cleaning up the property, catching up to market rents, and putting in rules to keep the grounds clean and safe).  There is room in the back to build a laundry space which could be coin operated, but I don't think that would increase rents and income enough to cover the expense of a new building and equipment.

So, am I missing something that makes this a good buy, or is it best to walk away?

Thanks in advance for any input.

Sean

[Account Closed]

The cap rate shouldn't be the end all be all figure for a property analysis. If the numbers don't work, they don't work, and it is inadvisable to try and finagle them to get them to work. 

If his pro forma numbers don't account for either vacancies or CAPEX as reflected by a 35% budget for operating expenses, then the numbers sound poor.

However, if you are confident that your rehab could bring in an extra $3000 in gross rents/month, then that might change your analysis. But you'd have to also account for the fact that your initial rehab costs are going to change your initial cash outlay -- especially if you don't have cash on hand to do it, and you're going to have to bring in hard money or a partner to do so.