Anyone want to crunch numbers on some example properties?

Question

Anyone want to help me do some analysis on two different properties?

One is a commercial (apartment building). I have 1 year as a loan processor in a commercial bank so I am somewhat familiar with the terminology and the analysis, but I'd like some help.

http://www.loopnet.com/Listing/21808235

Second, is a small single family which would be purchased as an investment. But more or less as practice in analysis.

https://b1iw.app.link/Z0968V7nOcb

I hope it's okay to post links...

And I guess I should say that we aren't necessarily in a position to make deals, st the moment, but if someone gets a deal from this, then all the better.

Evan Polaski · Answer

@David A Lisowski, the listing agent for the 4plex made a typo on his cap rate.  Per his pro forma, which clearly is not a pro forma, he is listing at a 33% cap rate, but since he also mentions it needs $200k in rehab, you are moving closer to a 10% cap rate based on his incomplete pro forma.  Add in real expense ratio of 50%, and would have a stabilized cap rate around 5% for a 4 family in Montgomery, AL.  I am not familiar with this area, but would not accept that kind of return for a $200k renovation on top of $100k purchase.

One thing to realize, with both single families and small multi's: the sale price will be based on what other properties sold, not the income approach and cap rate.  If you are really looking at buying these types of assets, you will also likely quickly find that most properties selling these days, particularly on MLS or Loopnet will not create much cashflow.  My assumption is the buyers of these assets are a) buying all cash, b) not fully understanding the costs associated with real estate, c) have much lower return requirements than me.

Steve W. · Answer

I just used the Realtor.com monthly payment calculator at 91.5k purchase price, 4.5% interest rate, 20% down. Says $485.

The house was built in 1928. Without knowing much else about the house (except that it is 90yrs old), I'd assume 10% maintenance and 10% capex. The vacancy rate at this link says 7.4%. It is a 1 bedroom though, so maybe there will be higher turnover. Plus there is additional cost like getting it rent ready and paying PM placement fee, and bumping it to 10% might not even cover that. Then 10% PM puts total expenses to 40%.

Your rent estimate is $700. Even if you bumped that to $800: ($800 * .6) - $485 = -$5. So doesn't look like a slam dunk to me. Maybe if you finesse the numbers you can get cashflow positive but probably not a whole lot.

James Wilcox · Answer

@David A Lisowski really not enough info for any type of analysis. I would just look at your own goals and what you want out of an investment property. I would say both of these are in more cashflow markets than appreciation markets. Being a MFH investor I would lean toward the AL property but unless you have a solid team for that area this could become a difficult property. There isn't a whole lot of detail on what rehab is needed as well. The SFH might not cashflow very well with the price to rent ratio however, probably easier to manage. No matter how good an investment property is on paper, if you don't have good property management, especially being an OOS investor, the investment will perform poorly.

Steve W. · Answer

What is your plan for the house in Kentucky? Are you wanting to make renovations or keep as is? How much investment are you wanting to keep in the property (20% down, or as little as possible?).

David A Lisowski · Answer

@Evan Polaski

Awesome explanation, Evan! I appreciate the write-up.

I figured that was the case with most of these. Almost the "too good to be true" kind of scenario.

David A Lisowski · Answer

@David A Lisowski

*Old house, managed from a different state...

I apologize for my typos.

David A Lisowski · Answer

@Steve W.

Thanks, Steve.

This is what I was looking for. I looked again, and my analysis is closer to what you have here. Barely breaking even.

I also don't anticipate this area to appreciate as much as other areas. But I'm no Nostradamus.

To get this to work, the PP and loan would have to be a lot lower. And yeah, an old house manager from a different state would certainly add other hidden costs or possible budget busters.

David A Lisowski · Answer

One thing I don't understand about the commercial listing is that the agent lists the Cap Rate as 25%...

So he's saying this property generates $24,975 annually?

So 4 units, is $6,243.75 per unit per year. Which is $520.31 per unit per month.

Would a 5 year plan is to improve property and tenant occupancy, and increase rent to $600+ per unit be feasible?

I'm more just wanting to find any mistakes in my thinking or analysis or any blind spots.

David A Lisowski · Answer

Ok. So for example, starting with the SFH.

Offer: $89,900 (looks like it's now pending anyway)

Finances:

20% down = $17,980

Closing cost = $2,500

Total = $20,480

Monthly: (4.5%, $71,920 loan)

P&I = $291.53

HOI = $50

RE Tax = $86.81

City Tax = $25

Total = $453.34 monthly

Quick search on rents, have 1/1 around $695. Since this is a SFH instead of an apartment or studio, might be able to charge a little more.

Vacancy = 5%

Capital expenditures and reserves. And would need a property manager.

So, if annual rent is $8,400, and there are $5,440 in known costs. Then factor in the vacancy and reserves and property manager, then is little left.

Even if it's, 5% vacancy, 5% reserves/cap. expenditures, and 5% manager (which is unlikely), it nets $1,700 annually (15% of $8,400 = $1,260). 8,400 - 1,260 = 7,140 - 5,440 = $1,700

Bumping the PM to 10%, I'm getting, $1,280.

Am I missing something in this analysis?

1,280/20,480 = 0.0625

1,280/ (20,480+2,570 [first year of interest]) = 0.0555

Of course, this is a remote analysis... for practice. I don't think I've ever been to Covington, KY.

Anyone want to crunch numbers on some example properties?

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