First Apartment Analysis - What Am I Missing?

[Ryan York]

Hey all!

Happy Monday.

My partner and I have been looking into apartments for a little while now, and we think we've finally come across a deal that works for us.

The complex is 8 units. Currently only one unit is rented out. Three units aren't in bad shape and can be rented out basically immediately with some very basic cosmetic work. We plan to rehab the remaining 5 units over the next 5 months.

Our plan is to rehab the units, get them rented out, and refinance out as much cash as possible as soon as possible. I'm planning for 3 years.

I've attached some PDFs below including our repair costs and analysis on returns. We feel like it's a good opportunity. Which leads me to the all important question, what am I missing? I'll bullet point some numbers below.

Purchase Price: 230k (cash only per the seller)

Rehab: 98k

Gross Rent After Rehab: 5600

Estimated Cash Flow After All Expenses: 12,278 annually

Estimated NOI After Rehab: 33,560 (including vacancy, all expenses)

Estimated ARV based on 10% cap rate in 3 years: 335,600

Post Rehab:

We'd refi and pull out roughly 268k (80% of our estimated 335k valuation), leaving us with about 60k in the property and a payment of $1,773 at 5% interest and 20 year term.

We realize the ARV isn't stellar in relation to what we'd have in it. I have a few reasons to believe it's still a good deal for us. First, most sold apartments in the area are closer to 9-9.5% cap rates. I'm just being conservative there. Second, we really like the area. It's currently probably a C area now, but it has all the makings for turning into the next popular little "main street" hang out spot. Lastly, the cash flow on this would be very good. I'm seeing over 20% cash on cash returns with all expenses included.

If we're even a little bit right about the area, and it went to say, an 8% cap rate, we'd be sitting pretty. If the market tanked, rent would have to drop 30-40% for us to start cash flowing negative. Assuming that didn't happen, we could easily hold the property until it rebounds.

Are we being blinded by the cash flow returns? Is the ARV too tight with the repair costs? What else?