[Calc Review] Help me analyze this deal

[Stephen Witkowski]

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*This link comes directly from our calculators, based on information input by the member who posted.

This deal looks like it cash flows well to me. If I don't put any money into repairs (I've never seen the inside so I have no idea what condition it's in - this is just an exercise), I'm seeing around 15% cash on cash return.

When estimating the rents, I went under what the seller had reported. You can see in the description that the seller is reporting total rent from all 10 units being $5,275. I assumed that that was high, can tried to price it a little better. 

By my math, a 10 unit apartment can have 2 3-bedroom units,  4 2-bedroom units, and 4 1-bedroom units

I assumed that the 3 bedroom units would yield $600, 2 bedroom units $500, and 1 bedroom units $400. This is a little conservative in Killeen, but not knowing the condition I wanted to plan for poorly maintained units. This adds up to $4,300 per month in rental income. 

I'd pay for water and sewage, which I estimated at $40 per unit per month - any advice to get a better gauge on what I could expect for that bill(s)?

I found a garbage rate which is about $18 per unit per month.

This is my first analysis I'm posting, so any kind of feedback is helpful!

[Robert Leonard]

I completely agree with everything @Matt Hurley said above. Personal comments I'll add in addition to his:

Although managing 10 units may be daunting for your first property, that could free up $430 in monthly cash flow, which would significantly increase (almost double) your estimated cash flow in your analysis.

Also, given the numbers you have in your analysis, your capital is going to be stuck in this deal. With an ARV of only $235k, you're not going to be able to refinance and get your capital out. This may or may not be an issue - some are fine with this.

At this point in the market cycle, to me personally, this deal is not intriguing. I don't like that my capital would be tied up/locked up in this property, the cash on cash ROI and monthly cash flow are both too low. Given where we are in the cycle, I'd recommend running at least two analyses. One where everything goes right - you get strong rental income, the market remains steady, property value continuing increasing, financing costs remain relatively stable, etc. Then, I would run another analysis where it is a "worst-case scenario". Estimate your rents contracting by the maximum amount you could see them declining by in the event of a recession (i.e. 20% decline in rents). Do the same for the property value. Increase your interest rate to the highest rate you could possibly be required to rate (this is specifically important if you have a variable rate (ARM) or a commercial loan product (which are usually adjustable but not always)). I even include in my analysis how low my rents could fall before my cash flow went negative. Given where we are in the cycle, if the numbers make sense in today's market, but not in a worst-case scenario, I personally would not pursue the deal.

That being said, you shouldn't NOT buy properties just because of where we are in the cycle, you just have to run the numbers very well, be confident in them, and plan for the worst-case scenario.

Robert Leonard