Taking a look at multi-family homes

[Ray Lim]

I found this market flyer for this property

It is a 8-unit multi-family property being sold at $800,000.

The market flyer seems to do the basic number crunching already. It calculated a CAP of 6%. It also already calculates the mortgage payment at LTV of 80% and shows a positive cashflow.

I am considering buying this b/c of the location. It is located in the U District near University of Washington.

However, I'm new to investing so I do not know if this is worth the price. The first link shows that it was built in 1906 which is over a hundred years old. Are there going to be large problems w/ the property in the future?

2nd, the cashflow calculated is $9118.
With a $160k downpayment that is only a COC of 5%
According to one source because the return is not that great compared to stocks, I should not consider this investment.

However below cashflow it adds a principle reduction of $6700 adding to a total return before taxes of $15.8k

What is this principle reduction? should I even consider it?

Please give me some advice or next steps in looking at this property.

[Jon Holdman]

This is a terrible deal as far as a cash flowing rental. Total monthly rents are $5960. Seven of the eight units are at $695, one is at $1095. Even by the classical rule of thumb that rents must be at 1% of the purchase price, this is overpriced.

Total gross scheduled rents per year are $72,780. Total expenses plus vacancy are claimed to be $21,053. That's 30%. They just aren't that low. The 50% rule (read in the Rental Property forum) would predict the correct number is closer to $36,440. That puts you negative to the tune of $6000 a month with their loan payment. I assume that includes a down payment.

I think the true cap rate is closer to 4.5%. The trick on rental properties is that the cap rate has to be higher than the interest rate you pay. Your return is then 100% of the cap rate on the amount you put down and (cap rate - interest rate) on the amount you finance. Your cash flow is less because of the principle payments.

This may be a "good deal" for the area, meaning its cheaper than any other property, but its still a very bad deal for cash flow. Maybe there's some upside in another way (condo conversion, long term appreciation).

When you see "proforma" read "pretend". If the seller expects to price the property based on what could be done with the property, he should actually raise the rents then sell. Buy based on actuals, not proforma.