8-plex deal cash flows, but probably won't pass appraised value?

[Doug Thompson]

Hello BP, I'm a new investor. I have been studying, reading, networking and building my education. I plan to flip, as well as long term SFR and MF. I have cash from recent sale of my last startup company. I've been working to make my first deal this spring, and hopefully a few more this year.

So, I found a seller of an 8-plex in a group of 4, this being the worst of them.  It is in a small town, with a huge factory, so there is extremely high demand for rentals, which will continue according to the city.  The current owner is considered unfavorable by most that I have spoken with at the city level.   Not a well run building, some issues with water, but nothing dastardly.

Here is the deal on the table, that I said I would do. No paperwork yet signed, but we were targeting a close date of June 1.  I'm using a local attorney for the purchase agreement.   He happens to be the city attorney.

8x 2BR, one building, built in 1971.  8x single car garage detached

rents at $650 ea, (in line, according to chamber of commerce)

Annual income $66000, includes extra fees for pets and cleaning fees, some laundry.

Expenses $42,639

Net Cash Flow $23,361

Purchase at $295,000

Down payment $73,750, Closing costs $4,000

Repair costs of $18,250, with another $5k needed in few years.

Using the BP rental analysis tool, I have accounted for monthly vacancy 5% ($275), Repairs and Capex $165, Misc $150, Management $432, Insurance $100, utils $614, taxes $404, P&I $1414. The local bank said if the building appraisal at $295k, they would finance 75% at 4.5% and 20 years.

So, Cash on Cash ROI at 24.33%, Purchase Cap Rate at $13.67%.

In my investigation, I noted from the county that the building next door changed hands 2 years ago, at $386k.   It is in much nicer condition, seems very well run.   The building next to that sold at the same time in the same deal.   HOWEVER, further digging shows that $386k bought BOTH buildings, so $193k each.   Whoa, good catch.

I have an attorney locally.  He feels the market was more of a buyers market at that time, and the sellers were ready to move.  However, the market probably hasn't moved that far.   My building has garages, the others don't, which is worth something. Not as well run tho.

My questions are;

1. By cap rate, I couldn't buy anything close to this here in the Twin Cities, Minnesota.  Cash flow wise, it still makes sense to me.  Am I mistaken?
2. My local attorney feels that this won't appraise at the value I need for the bank.  I'm unclear if commercial appraisal would look at Cap Rate, or comps, or probably both?  Any insight here is helpful.  I could pay all cash, but then lose opportunity for many more deals.

I don't feel I'm overestimating rent income, after talking with chamber. Possibly underestimating repair and operations, which would bring down CoC and Cap Rate.

My mind is telling me that I need to renegotiate the price, although have heard the seller say he has 2 or 3 other buyers interested.   I don't want to overpay, but $250 / door cash flow doesn't seem out of line.   

I owe the buyer a response of some form this week.

I'm out nothing other than the $1500 I have into the evaluation (structural eval, atty).

Feedback from any experienced investors is greatly appreciated!