Analyzing a Multifamily in Central Jersey

[Eric Waterman]

I drive by this multifamily near my house in Central Jersey all the time and it recently went up for sale. I called the listing agent to get the details: Home has two, 1 Bed/1 Bath apartments (upstairs and downstairs) with separate entries. Currently the downstairs apartment has been rented for $1,200/mo for the past 1.5 years and the upstairs is currently vacant, but they are taking applications and asking for $1,000/mo. The upstairs has been vacant for 7 months. The listing price is $320,000. Interestingly enough, the property was under contract for $234,000 two years ago, but the deal fell through. When asked why now the jump in price, I was told that the owner wants to see what he can get now that it is rented. I asked how did the owner arrive at the $320k valuation...all I got was that's just what the owner wants.

Now, I am new to this...so new in fact that I've never bought a property before. Doesn't this sound odd? I attempted at doing some income valuation on the property. Assuming the upstairs apartment was rented out by 1 June, as I was told...that brings the rent to $2,200/month, $26,400/yr. (Big assumption, I know).

I tried to find the Net Op income by applying a 20% vacancy factor, 2014 property taxes was $5,700, estimated maintenance $3,000 and insurance of $1,500. Using those numbers I arrive at an operating expense of $15,480. If the upstairs is rented, the net operating income would be only $10,920. Did I miss anything in that analysis or did something look wrong? Based on a cap rate of 10%, the most I would want to pay is $109,200. And that is all dependent on the upstairs being rented out! I offered $65,000. Let's just say, it was denied. Maybe I need to take it as a sign to run for the hills. Who's crazy...me or the owner...or both?

As far as cash flow goes, if I finance the purchase with 20% down...I would lose my shirt at $320k. I estimate I wouldn't break even until $160k. Is this owner's head in the clouds, or am I doing something wrong?