Potential Deal? Smart People Please Chime In

[Ayodeji Kuponiyi]

Found an 8 unit apartment. They're asking $515,909. 

Cap Rate is10.93. 

Total monthly Income is: $6,380 & $$76,560/year

This is my analysis:

I used conservative numbers such as 30% financing and estimated 55 expenses.

I adjusted the purchase price to reflect the given cap rate.

Thoughts?

[Chris K.]

Hi @Ayodeji Kuponiyi --- having an accurate cap rate matters, but my main concern is not that.

You have two options for calculating operating expenses: (1) include CapEx Reserves into it; or (2) don't. In my area, unless I'm dealing with very sophisticated sellers/buildings (e.g. industrial factories), most people mean option 2 when they say "operating expense."

The chart below hopefully shows how drastic of a change that can make. Option 1 says you should pay $252,164.68 for the property at 10.93% cap rate while Option 2 says you should pay $378,247.03 for the property at the same cap rate. 

Note that the cash flow is exactly the same in both options (although you would have to put in about $120,000 more to keep the debt service the same).  

So that would be my most important question I have: do you live in a market where it uses option 1 or option 2? My guess is option 2.