Multi-family Deal in Michigan

[Justin Sadauskas]

Hey guys - can you help me analyze this deal through?  

I am considering purchasing a 4-unit multi-family for $230,000.  I would put $100,000 into the property.  This would include completely remodeling all four units, new kitchens, bathrooms, decks, roof, siding, furnaces, hot water heaters, windows, landscaping and a new parking lot in front of the building.  The area is very good with very expensive subdivisions all around.  

PP - $230,000

Renovations - $100,000

Total rent once renovated - $1100 per unit = $4,400/mo

Taxes = $4,700

Insurance = $4,000

Is this a good deal? Secondly, I am a little confused when people talk about cap rate? When people talk about selling at a 10% cap rate are they including operating expenses into their NOI figure? It seems to me they just take gross rent and subtract taxes and insurance and any other fixed costs. Would it be fair to assume that if multi-families are selling at a 10% cap rate that $4400x12 = 52,800 - 4700 -4000 = 44,100. At a 10% cap rate, purchase price would be $441,000? Does that make any sense to anyone?

All thoughts appreciated.  

[Walter Roby jr]

You are forgetting Cap Ex, Property management, and Vacancy. Even though you are renovating the entire thing you do not want to leave this out because eventually everything will break. Does the 1100 rent compare to the local market? If rents are high you may have higher vacancy and visa versa. Ask around local PM companies and apartments for vacancy and PM costs for you areas. If standard vacancy for your area is 5% at market rents and PM is 10% then you would have 44100-5280-2640=36,180. If avg cap rates are 8%then all in would be $452K. If avg cap rates are 12% then all in would be $302K. You rate would be 11% Cap Rate at PP $330K.