Is this an OK deal?

[Kim H.]

I am looking at a small multi family property that has current rents of $7800 per month, but I believe that rents could eventually be increased to $9200 per month. The cap rate is just over 5%, according to the seller, but I think it's closer to 4%, using the 50% rule. The property is in a great residential area that is growing and is mostly newer single family homes. The property doesn't need a lot of work and is 100% occupied. Raising the rents would be gradual as leases renew, with possibly some minor updating (carpet, countertops, paint). Other expenses appear to be in line with another small multi family I own. I would prefer to purchase something with a higher return, but just haven't found anything in the past few years. Would you buy a property with a 4-5% cap? 

[Henri Meli]

@Kim H. Looks like you can add $9200-$7800 = $1400 in new income to the property. It might take you 12-24 months to achieve that. That would be $16,800 in NOI (assuming no additional expenses). At a 5 cap (assuming it is typical in that area since that is what you are being asked to pay), that's an addition of close to $300k in value.

The potential for value is not too bad, but there is very little room for error and execution has to be perfect. You wouldn't want surprised capex, surprised vacancies, unexpected expenses, ... etc.

You should try and see if you can add additional income producing things (laundry, short term rentals, pets fees, RUBS? ...). Some of those cost money upfront. 

Here is an aspect that is sometimes overlooked: If this is your first MF, then this is a learning opportunity for you. Proceed with caution and pay attention to details. Be on top your property manager/tenants regularly to avoid surprises.

Good luck.