How much would you pay for this building?

[Sharad M.]

Hello all,

OK so it's a 8 unit building with 6 3br units and one 2 bd and 1 bd each. The rent is as follows:

Six 3 brds - $825/each (tenant pay their own utilities)
2 bd - $650 (tenant pay the utilities)
1 bd - $700 (owner pays the utilities)

Total rent of $6,300/mo

The taxes are $6,500 for 2009. The property is on a main street. The property is in decent part of the town. The seller is asking $650,000 for the property. I am looking at the property tomorrow, but from the pictures, it looks in decent shape.

Can I use the 50% and 2% rule on a commercial property? If yes, using 2% I get a purchase price of $315,000. I looked up the property's info on Lexis Nexis, and it shows that the seller has a loan of $360k against the building. But on the county's website, it shows assessed value of $167,200. The appraisal is as of Feb. 2008. If anything, the assessed value is even less. I am little confused as to why these amounts are so off.

What would you guys offer for this property?

[Jon Holdman]

The 2% rule is a little pessimitic for the rents you list. Nevertheless, the $650K asking price is way too high for you to make any money. Here's my quick and dirty analysis:

Rents: $6300
Expenses: $3150 (50% rule, probably the best you'll do on this property)
NOI: $3150
Desired cash flow: $800 ($100/unit, 8 units)
Left for payment: $2350
Max mortgage: $390,000 (6%, 30 year note)

Lets run that the other way and see how it looks:

Price: $390K
Down: $117K (30%)
Loan: $273K
Payment: $1636
Cash flow: $1513/month
Cash flow: $18,158/year
Cash on cash return: 15.5%

I can't see going much higher than the $390K number unless there's some other upside.