New to learning multi-family.

[Tony Whitaker]

Hello Everyone,

I am brand new to learning the investing game, I am trying to build a knowledge base while also trying get into position to make deals (saving money, credit, knowledge etc...) I copied an ad for two complexes near me with 50 units total. I have no clue what any of it means. I would appreciate it greatly if someone could explain what the ad means. Ad pasted below.

Vanguard Real Estate Advisors is pleased to present the opportunity to purchase Town & Country and Simpatico, a value-add multifamily opportunity totaling 50 units in the heart of West Texas in the city of Midland. Located less than one-mile from one another, the Properties are strategically located and have been well maintained by current ownership. Both Properties feature full-size washer/dryer connections, swimming pool and covered parking.

Built in 1968, Town & Country is located at 3310 Bedford Avenue and consists of 25 units that average 897 square feet. Town & Country can be purchased at a 9.50% cap rate on in-place financials, adjusted for taxes and replacement reserves above the line and an 11.55% cap rate based on pro forma NOI. In-place cash-on-cash returns are projected at 17.5% at an asking price of $1,550,000 and 24% based on pro forma assumptions.

Built in 1967, Simpatico is located at 2910 W. Michigan Avenue and consists of 25 units that average 773 square feet. Simpatico can be purchased at a 9.60% cap rate on in-place financials, adjusted for taxes and replacement reserves above the line and a 10.68% cap rate based on pro forma NOI. In-place cash-on-cash returns are projected at 17.8% at an asking price of $1,500,000 and 21.3% based on pro forma assumptions.

Significant upside exists for a new investor through an increase in market rents and a reduction in operating expenses to market norms.

A co-brokerage fee of 2% is available to a Broker that sources and registers a Principal that neither Vanguard nor current ownership have previously contacted regarding this opportunity.

Seller prefers to sell the assets together as a portfolio.

[Chris Grenzig]

@Tony Whitaker I'll try to give some brief oversight. First off if they're posting a general ad, they're going to be looking at the deal through rose-tinted glasses, so I would take everything they say with a grain of salt.

Overview: 50 units, 2 properties, built in 1967-68 (watch out for deferred maintenance), asking for $1.55 mil and $1.5 mil or $3.05 mil together, purchase it at either 9.5% or 9.6% cap rate on in place financials.

I'm assuming you're questions are more geared to what they're talking about in terms of Cap Rate, NOI, pro forma, etc.

Cap Rate is used to determine the price, the formula is: Net Operating Income / Cap Rate = Purchase Price.

So if you have 2 of the 3 you can figure out the third. $3.05 mil x 9.5% = $289,750. Both properties combined should produce that after all expenses are taken from the income. Even though one property is 9.6% I used 9.5 to be slightly conservative. 

Pro forma means projections or predictions of how you think you will operate the property in the future. You base this on you're own operations in the past, knowledge of the market, how the property has done in the past, and what you're property manager thinks will/can be done. 

So when they're talking about Pro forma cap rate, they're saying that "according to their projections" you should be able to increase you're return from 9.5% a year to 10.68%. However, they say a 17% Cash on Cash return because if you have a mortgage in place you will make more than the cap rate. The reason being if you have a 75% mortgage and it's a 4.5% rate, than anything over that 4.5% goes to you, thus adding to you're 9.5% return on the other 25% that you used as a down payment. 

Notice I put a cording to their projections in quotes because most times what a broker projects/underwrites, especially on smaller deals, is often the best case scenario or not attainable or not realistic. So you have to do you're own analysis and come up with a price you are comfortable with offering and if it works than thats how a deal gets done.

Hope that helps some, let me know if you have any other questions!