Help Evaluating Property

[Luis Barberi]

Hi all,

New to multi-family apartment.  I need some help evaluating a potential multi-family.  24 unit in 1 building apartments in North Carolina.  Currently 100% occupied.  Looks like shared expenses for electricity, sewer/water and internet/cable.  It is right across the street from a university.  

Thank you very much in advance!!!

Here are the details.  They are asking for $1.4M 

Income

2016 Numbers $210k Gross income + 7k Other income = Total income $217K

Expenses:

2016 Utilities - $61k

2016 Maintenance - $10k

2016 Turn costs (seem high but it is located near a University) - $7k

2016 Rental Operating Costs (advertising, court, credit checks, Public Relations??) - $7k

2016 Insurance: $8K

2016 Property Management Fees:  $11K

2016 Office Expenses (Phones, answering service, admin, computer cost, software fee ???) - $3k

Then they add some more weird stuff..

2016 Labor expense (Payroll Labor, work comp, employee benefits, etc) $21k

Total Operating Expenses: $129K

2016 Taxes - $27K

Total Expenses:   $156K

NOI = $61K

I know you don't add the mortgage but do I include the taxes in the cap rate?  So cap rate is 4.35%, right?  Low, right?

Seems like at this price point putting 30% down and getting a mortgage for $980k @5% (assumed) gives me a P+I of $5k or $60k annually which barely covers the NOI. Unless we are paying cash or getting a significant reduction in price it doesn't seem worth it right? 2017 rents have gone up about 6% but still not quite seeing the opportunity on this one.

Also it seems those expenses are out of hand, maybe the management company is running their office numbers through the building?  

I haven't seen the property but would definitely separately meter the units if we did go through with it.

Thanks again!

[Thomas Franklin]

Luis Barberi You need to calculate the DSCR(Debt Service Coverage Ratio), to determine if the Subject Property will even qualify for Commercial Financing. The vast majority of Commercial Lenders want to see a minimum DSCR of 1.25. Below is an Real World Example of how to calculate the DSCR. The numbers below are of a Multifamily Property I am analyzing, for potential acquisition.

Be sure to use gross potential rents (GPR) and not actual collected rents for rental income minus Vacancy that yields the Effective Gross Income.

1. Determine the total Annual Expenses.

2. Determine the NOI: Annual Expenses - Effective Gross Income = NOI.

3. Determine Debt Servicing: 0.3 x Sales Price = Loan Amount. Use an Interest Rate of 6% and an Amortization Schedule of 25 years.

Example:
Sales Price: $750,000
Down Payment: 0.3 x $750,000 = $225,000
Loan Amount: $750,000 - $225,000 = $525,000
Interest Rate: 6%
Amortization Schedule: 25 years
Annual Debt Servicing: $3,382.58 x 12 = $40,590.06

To calculate the debt service coverage ratio, simply divide the Net Operating Income (NOI) by the Annual Debt. DSCR = Net Operating Income / Annual Debt Service. Assume NOI of $61,047.

DSCR = $61,047 / $40,590.06 = 1.50

I hope you find value, in the above information.