advice on a deal -- first 4 plex

[Jonathan C.]

Hey folks

I started RE investing about a year ago after studying it for a while. I live in the Washington DC area and now own two condos, both positive cash flowing, one at +$340 (cash/cash @ 11%) and the other at +$330 (cash/cash @ 8%).

A friend in NC alerted me of a deal on a fourplex (not on market) but here are the specs:

Price: $240k

Currently fully rented at $2100/month (four each at $525 -- other identical fourplexes rent for $550, so I should be able to squeeze an extra $100 within a year).

Monthly Costs:

Electricity: $20 (just for some common area lighting -- each unit has its own separate meter for electricity and gas)

Prop taxes: $90

Water: $125

Garbage: $50

Septic: $30 (Costs about $1000 and need to do it once/3 years)

Landscape: $50 (my estimate)

Manager: $100

Insurance: $100

So total monthly costs are $565

Assuming I can finance 75% on a 30 fixed note @ 5%, P+I should be $966. Total monthly costs are thus $1531.

This positive cashflows at $569/month, with cash/cash at 10.5.

Cap rate on the building is thus about 7.7%. (~18.5k/240k)

Thoughts on this deal? Very attractive in that it's already all rented out...i could conceivably not hire a management company for a few months. It's not immediately close to my home, but I can go there and back in a day (it's about a four hour drive each way). Slightly apprehensive as it would be the first freestanding building I'd own (short of my own home).

Thanks for any help!

[Ben Leybovich]

@Kenny Anderson

First of all - thank you for your service!

CAP Rate is a measurement of the rate of return which juxtaposes the total investment to NOI. For example, if I were willing to deploy capital so long as I receive a 10% cash on cash, then for investment opportunity which generates $5,000/year I would be willing to pay $50,0000. 5k is 10% of 50k.

The reason we don't use Cash on Cash is because we need to measure apples to apples relative to financing. You could buy a building with 75% leverage (25% down), while somebody else would pay cash for the entire purchase. Both need to have a common way to evaluate the deal, which is the Capitalization Valuation.

We use the NOI (Net Operating Income = Gross Income - Expenses not including Cost of Money) as the basis for this calculation:

Value = NOI / CAP

So, if the Annual NOI is $15,000 and we need to receive a 10% return relative to Capitalization Rate, then the most we can pay is:

Value = $15,000 / 10% = $150,000

If we pay more, then our return is less that 10 CAP, and visa versa. This only scratches the surface but I hope it helps!