Move on it, or just move on?

[Graham Nash]

BP,

I'm looking for some thoughts on this potential deal. I keep going back to it, not sure if it's because it has good value, or I'm just trying too hard to make it work. It's not listed on the MLS, but it was brought to my attention through a licensed agent. Here's the info I have so far…

32 units, all brick, 100% occupied, rent has not been raised in 10 years. Property is in very good shape.

Gross monthly rent $19,400 ($232,800 per year) 50% = $116,400

Asking price is $2,000,000

Cap rate=.058 = not a deal.

It’s the owner financing option that I keep coming back to.

The conversations I’ve had with the agent led me to believe the owner is flexible when it comes to terms rates, etc... He appreciates the monthly income, but his age will soon be a factor because he has self-managed since the properties were built in the late 60’s.

Here’s what I’m thinking…

Buy in for $100,000 down (my price) offer $100,000 per year for the next 19 years (his price).

Monthly numbers (Gross $19,400)

Note $8,335=$100K

Tax $850

Insurance $1,200

Cap X $1,950

Maintenance $1,950

Vacancy $1000

Management $1,950

Tenements currently pay water/sewer/trash

Total expenses $17,235

NOI $2,165 per month, Annual NOI $25,980

Cash on cash return = 26%

My question is this, at what point does the cash on cash return validate a purchase that has a lower than ideal cap rate? Or can it?

Feedback would be greatly appreciated, especially from those who are experienced.

Thanks for your time,

Graham