Cap rate % is higher than cash on cash %?

[Phil B.]

Does anyone own properties where the CoC is lower than the cap rate? Numbers below. Thanks

Fully occupied 24 units

Gross rental income $213,613

Tax $25k

Insurance $6,252

Water $12k

Sewer $17k

Comm. bldg & common area Gas/electric $13,500

Landscape/snow removal $5k

Property management (8%) $17,089

Trash removal $2,200

Vacancy (10%) $16,800

Repairs ($800/unit) $19,200

___________________________

Total expenses $134,041

NOI $79,572

Purchase price 1,150,000

25% down Debt 5% 25yr am 7 year ARM $60,504

Cash flow $19,068

Cash to close $300k

CoC 6.3%

Cap rate 6.9%

[Spencer Gray]

The short answer is no. If there was a plan to increase NOI and therefore increase cash on cash by year 2, you could justify the project if you were then getting a high COC figure.

I would explore different financing options. 5% is high in todays market (I'm getting quoted in the 3.5-4% range).

Have you looked at a Fannie or Freddie Small Balance Loan? Fixed rate of 5, 7 , 10 year terms with 30 year amortization vs the 25. You also can get a few years of interest only to increase cash on in the beginning. You may also be able to go 80% LTV depending on the market.

Is there a plan to increase NOI by raising rents or reducing expenses?
Your expenses are on the high side at a little over 50% (usually in the
40%-45% range) and the 8% management fee doesn't help.

You should be able to cash on cash 8%+ with the right debt, especially if you reduce expenses closer to 45%.