$ 2.0 million complex

[Harri Smith]

Hello
There is 2.0 million $ apartment building for sale and they claim to NOI to be 142K/year. How can I analyze an apartment complex assuming I give it to a management company?

[Steve L.]

You have the information to calculate the capitalization rate (cap rate for short).

The formula is:
Yearly NOI / Acquisition Cost = CAP Rate

Actual numbers:
142,000 / 2,000,000 = 7.1%

That number means if you paid all cash you would earn 7.1% return on your capital. If you are excited about those terms the next two steps would be to analyze if the NOI is correct and what your cash-on-cash would be.

Cash-on-cash would include any financing that would be involved in the deal. Say you had the ability to get a loan for 1,500,0000 @ 4% amortized over 25 years. Your payments would be $95,010/year (roughly 36,000 of that is principle pay down year 1). Leaving 47,000 of cash-flow. You would have 500,000 of your cash invested.

Cash on cash formula
47,000 cash-flow / 500,000 = 9.4% cash-on-cash return.

The numbers on this deal don't seem very exciting to me.