8 Unit Deal Analysis

[Anthony Palmiotto]

I have a deal that I would like some feedback on. This 8 unit is located in a very safe town. However, unemployment here is about 2.5 points higher than the state average. Also, the population here is growing at 14% per year.

So total income for the property is $78,000 assuming a 5% vacancy rate which is fair for this property based on its rental history and my state's average vacancy.

Total expenses are at $28,250 which includes $625/month for maintenance/reserves for each unit. I usually see this number at $500 per month but I'm being a bit more conservative than that.

That leaves me with this:

$78,000 Income
$28,250 Expenses
$49,750 NOI

I think that I can get this building from the motivated seller for $400,000. I think that $50,000 per unit is a little high in this area of the state but that would come out to a 12.5 cap roughly (basically unheard of in my state unless you're buying in a war zone).

If I borrow at 5.2 percent and have a 75% LTV I would have a mortgage of $19,800 per year.

That leaves me with:

$49,750 NOI
$19,800 Debt Service
$29,950 Cash Flow

That is roughly a 30% cash on cash return. Seems like if everything checks out during due dilligence, this would be a good deal. In addition, there might be an opportunity to add a 9th unit in the basement my finishing it off and there also may be a little but of upside in the rents to the tune of about $3,000 per year.

Thoughts? Thanks in advance.

[Joel Owens]

44.71 per unit for water and sewer combined per month per unit sounds low to me unless the usage is in line with averages for the area (you can call the water company to verify standard gallon usage for expected people living in that size of a unit and water engineer for the department can tell you). I use to have to go over this part with them on my buildings for the water bills.

It could be water and sewer is very low for the area rates wise but usage is correct. If it is really low it goes back to is there a big increase coming or special assessment to offset all the years they have kept rates deflated??