8 units - Monthly cash LOSS of $6,000 - where did I go wrong?

[Adam Sherritt]

Hey guys, 

So I've heard this rumor that the goal in real estate is to actually make money.  With that being said I am very confused as to how this deal would make sense to anyone. 

Now I am still cutting my teeth when it comes to analyzing multifamily deals, but I figured I would show you guys my numbers with the hopes you can tell me where/if I went wrong.

Asking Price: $2,100,000 (has offer of $2,000,000)

Number of units: 8 

EGR (Effective Gross Revenue): $7,160 / mo.

Operating Expenses: $2,952 / mo. (not verified, this # was pulled from appraisal which used a "market derived expenses" technique to generate expenses.  I have asked seller for actual expense sheet.)

Now, if you run the 50% rule with these initial numbers (and assume a 20% down with 3.6% financing) you get an NOI of $3,580 ($7,160/2) and a mortgage payment (P&I + insurance + prop. tax) of $9,614 for a total of -$6,034 in cash flow. Not exactly the $800 ( 8 x $100) in cash flow that we are looking for.

Now, the appraiser forecasted EGR at $9,705 (36% increase.)  Ok, not bad, maybe that helps the bottom line...

Yea, not even close...In order to cashflow $800 (8x100) for this deal the rents would have to be set at $2,503/unit.  That is a 106% increase from "potential" and 180% higher than current!!!  

So my question for you guys is how does any investor make sense of this deal at $2.1m? Even with free money you'd only have a 2.05% ROI. At that point U.S. Treasuries are a better deal at 2.75%.