Please help me analyze my first multifamily deal (with some #s)

[Javier D.]

Good morning BP,

Thank you in advance for reading my post. I have over the past 10 years acquired 23 doors consisting of sfh and duplexes throughout Florida. Right now I'm working on a 40 unit about 4 hours from me which looks like this:

Monthly Operating Income	Scenario A
Total Rental Income	34,360.00
% Vacancy and Credit Losses	5.00%
Total Vacancy Loss	1,718.00
Other Monthly Income (laundry, vending, parking, etc.)	-
Gross Monthly Operating Income	32,642.00
Monthly Operating Expenses	Monthly
Property Management Fees	832.00
Repairs and Maintenance	1,000.00
Real Estate Taxes	5,241.00
Rental Property Insurance	1,959.00
Homeowners/Property Association Fees
Replacement Reserve	2,000.00
Utilities	1,291.00
- Water and Sewer
- Gas and Electricity
- Garbage
- Cable, Phone, Internet
Pest Control	155.00
Accounting and Legal	150.00
Advertising
Monthly Operating Expenses	12,628.00
Net Operating Income (NOI)
Total Annual Operating Income	391,704.00
Total Annual Operating Expense	151,536.00
Annual Net Operating Income	240,168.00
Capitalization Rate and Valuation
Desired Capitalization Rate	10.00%
Property Valuation (Offer Price)	2,401,680.00
Actual Purchase Price	3,100,000.00
Actual Capitalization Rate	7.75%
Loan Information
Down Payment	620,000.00
Loan Amount	2,320,000.00
Acquisition Costs and Loan Fees	60,000.00
Length of Mortgage (years)	30
Annual Interest Rate	4.970%
Initial Investment	680,000.00
Monthly Mortgage Payment (PI)	12,411.76
Annual Interest	114,527.10
Annual Principal	34,414.02
Total Annual Debt Service	148,941.12
Cash Flow and ROI
Total Monthly Cash Flow (before taxes)	7,602.24
Total Annual Cash Flow (before taxes)	91,226.88
Cash on Cash Return (ROI)	13.42%

The property is being given to me after completing 40 year certification (updated plumbing, electrical, parking, most units are decently remodeled. Only cap ex I see is the roof which I estimate will need to be replaced over the next 5 years (100k) . I added this into my replacement reserve at 2k a month included in my numbers.

The financing is as follows:

10 year fixed (2 year option interest only)

4.87%  interest only would be 119,280/year . principal+ interest 154,000.

Im thinking it is a decent deal based on either option as far as payments go. I'd probably go with interest only option first 2 years to get some of my principal back and fatten up my reserves. Im a little nervous as I am not used to multifamily (this is a 40 unit). What I do see is for 620 I put in Im cas hflowing 91-100k (my operating expenses are very conservative). There is some room for value add ( I think that is the term from what ive learned here). and the area is a good rental area. 

Is this something you would do? Am I in the right path here? Im questioning myself on it. Thank you for taking the time. I hope I was as specific as needed. 

[Scott Skinger]

I don't have time to go through and thoroughly underwrite this deal right now but a few quick things stick out:

-looks like the above is straight from a broker's pro forma in their OM, not based on actuals

-your expenses are at 38% including capex reserves, almost definitely too low for this property

-there's a lot you're not considering with you CoC figure of 13.42%. What about up front repairs? operational cash flow to get started? up front cash for emergency roof fixes, etc.?

-you need to consider disposition of asset, exit cap rates and valuation at key points like refi (if that is part of your strategy) and end of loan term 

Overall, I would say that all of the above needs to be put into a MF underwriting model as there are a lot of factors missing that will blow this investment up (in a bad way).