New Guy Needs help with multifamily analysis

[Jerrmarco Rhodes]

I found this deal which is actually for 2 properties with a combined total of 125 units. This is priced at $2,800,000 . The listing says it has a cap rate of 12.84%. I divided the NOI by the derived cap rate(from the band of equity formula) and correct me If I'm wrong here which I probably am, but it says that the maximum purchase price is $4,494,500. I'm not sure if this is correct. I just trying to apply these formulas that I have learned. There is also a cost by the buyer of $30,000 to install security alams. Should that $30,000 be subtracted from the price of the property? And In my calculations, I got $359,560 for the NOI, however in this ad, they list $359,520 as the NOI. Which one is correct? Thank you for your help. Here is the data:

Location: Belle Glade, Florida
PAHOKEE PROPERTY
52 Units
8 - 2/2 @ $400/month
43 - 1/1 @ $300/month
1 - eff @ $200/month
Current Vacant 14 apartments

INCOME
Total Gross Rent $195,600/year
Laundry Income $12,000/year

EXPENSES
Taxes $22,400/year
Insurance $10,000/year
Management $12,000/year
Utilities $12,000/year
Tenants pay own utilities and provide own appliances.

TOTAL NET INCOME (excluding vacancies and repairs)
$151,200

BELLE GLADE PROPERTY
73 units
current vacant 17 apartments
17 - 2/2 @ $400/month
56 - 1/1 @ $300/month

INCOME
Total Gross Potential Income $283,200/year

EXPENSES
Taxes $39,600/year
Insurance $ 11,640./year
Utilities $3,600/year
Management $20,000/year
Tenants pay own utilities and provide own appliances.

TOTAL NET INCOME (excluding vacancies and repairs)
$208,360

Note for Belle Glade: Owner would have to install fire alarm system (cost estimate $30,000)

Its actual 4 builds
Financial Summary

*
Actual
* Net Operating Income
$359,520

[Jon Holdman]

The expenses for these properties are WAY understated. You write:

PAHOKEE PROPERTY
INCOME
Total Gross Rent $195,600/year
Laundry Income $12,000/year
TOTAL NET INCOME (excluding vacancies and repairs)
$151,200

BELLE GLADE PROPERTY
INCOME
Total Gross Potential Income $283,200/year

TOTAL NET INCOME (excluding vacancies and repairs)
$208,360

I'll analyze the first one and leave the second one as an exercise for you. Being able to do this analysis yourself, with nothing more than a financial calculator or Excel is essential, IMHO, if you want to get into this business.

Let me start by saying that $300 in rent is a very low figure. If you apply the usual goal of extracting $100/month/unit from $300 in rent, what's left for expenses and debt service is only $200. $150 of that is expense (50% rule, which I assure you applies to these properties), leaving only $50 for debt service. At 6% and 30 years, that is a loan of $8,340. So, just a rough analysis says we're going to end up at about $425K as a value for the first property. The second one will be somewhat higher, but $2.8 million is clearly a ridiculous price if your intention is to actually have income. I could care less about "realistic expections" or "local cap rates" or any of the othe BS that's spewed to get people to buy into crummy deals. My goal is to make money, not own real estate.

On Pahokee, they have these:

Rent: $195,600, that looks correct
Claimed NOI: $151,200
Implied claimed expenses: $56,400
Percentage of rent: 28%
I'm ignoring the laundry income, which is effectively a separate business.

There is absolutely no way the expenses are 28% of the gross rents. Look at all the stuff they DON'T list: maintenance, pest control (this is FL), grounds keeping, vacancy, evictions, legal fees, bookkeeping, capital improvements, etc. Its good that the tenants pay utilities, and being in FL is probably a bit lower than in northern climates, but lets go with 50%. If you're really, really good at this, you might do a little better. You could do MUCH, MUCH worse.

Rent: $195,600
Expenses: $97,800
NOI: $97,800, $8150/month

Now, lets do a break even price, based on 30 years at 6%, 100% financing (unrealistic, but gives a number. Essentially, this is the opposite of the cap rate, which assumes 0% financing). I get $1.359 million.

OK, now lets do a more realistic loan of 20 years at 8% with a 25% down payment. You really should speak with a commercial loan broker and find out realistic terms. I've not spoken with one recently, so I may be off with these numbers. If you do, please post what you find.

Down payment: $340K
Loan: $1.02M
Payment: $8528/month, $102331/year.

Oops! We're losing $4500 a year. So, lets go back and put in that $100/unit/month in true cash flow.
NOI: $97800
Desired cash flow: $5200/month, $62400/year
Left for payment: $35,400/year, $2950/month
Loan/price: $492K (6%, 30 years, 100% loan)

Now, again, lets put in a real loan
Down Payment: $124K
Loan: $369K
Payment: $3087/month, $37K/year
Cash flow: $60,759/year
Cash flow/unit/month: $97
Cash on cash return: 49%

Now, that's really good. So, we could pay more. Nevertheless, every tenant is someone to deal with and every unit has to be leased, cleaned, painted, etc. Nevertheless, lets go for a 20% cash on cash return and see what we can pay. If we pay $775K we get:
Down: $194K
Loan: $581K
Payment: $4861/month, $58342/year (8%, 20 years)
Cash flow: $39,458/year
Cash flow/unit/month: $63
cash on cash return: 20.4%

Scaling up just based on the unit counts and gross income, I'd put the second property at about $1.12 million for a total of $1.9 million. I'll admit that's pretty close to the $2 million Brecht says. That's low in terms of return per unit, but that's a direct effect of these very low rents. I'm not at all convinced that's a great investment at the $1.9 or $2 million price.

You should work through the calculations for the second property. In Excel, the PMT (payment) and PV (present value) functions are your friends. PMT to calculate the payment for a given loan, rate, and term, and PV to calculate the loan amount for a given payment, rate and term.