6-unit, Below Market Rents, FSBO, Owner Wants to Retire

[Marc Dela Cruz]

I have a deal. It's my very first deal, so I don't want to screw it up. I appreciate any tips and advises.

6-unit each 2bdr 1 bth - Asking Price: $1,200,000 ($200k per unit)

ACTUAL

Income: $84,000 ($1,166 per unit; below market)

Expenses:  $23,205 (27.63% EGI, $3,867 per unit)

NOI: $60,795

Debt Service: $48,123 (30% down, 30yr am., 4% int.)

Cash Flow: $12,671

Cash on Cash: 3.52%

Debt Coverage Ratio: 1.26

Gross Rent Multiplier: 14.29

Occupancy Break Even Point: 84.91%

PROFORMA

Income: $158,400 (market rents)

Expenses:  $23,205 (27.63% EGI, $3,867 per unit)

NOI: $135,195

Debt Service: $48,123 (30% down, 30yr am., 4% int.)

Cash Flow: $87,071

Cash on Cash: 24.19%

Debt Coverage Ratio: 2.81

Gross Rent Multiplier: 7.58

Occupancy Break Even Point: 45.03%

Exit Strategy

PROFORMA VALUE: $2,703,900 (NOI/5 CAP)

Cash-out Refinance: $2,027,925 (75% LTV)

Loan Principal Balance: $840,000

Initial Investment: $360,000 (down payment)

Net Profit: $827,925

[Account Closed]

Marc,

Let's connect if you're looking to wholesale it. I'm more than happy to sign a NDA if you want. 

Here are some things to consider:

1. The market determines the cap rate. Do you know what's the market cap rate for this city/area? 5% sounds reasonable, but....

2. Property taxes seem off. At $1.2M purchase price with some special assessments, my guess the property taxes are closer to $18k/year.

3. Insurance seems a little high. Does the building still have knob & tube wiring? How's the plumbing system? Is the building on concrete or brick foundation? Is it a soft-story building?

4. Water/Sewer is in-line. 

5. Trash seems in-line.

6. What about PG&E? Landscaping? Repair & maintenance? Cap-ex reserve?

7. Property manager fee?

8. Annual City Permit Fee?

9. Lenders use 5% vacancy for their underwriting. 

The current expenses will likely be closer to 50% due to low property taxes. Once stabilized, your expenses would be closer to 40-42% including cap-ex. 30-35% won't cut it unless you plan to manage and do all the repairs yourself.

If it's in one of those crazy rent-control cities, how are you going to get from $84k to $158k in rent? How much money do you have to spend to bring rents up to $158k? $200k to remodel inside out? I don't see this has an exit value of $2.7M.