Please give me your thoughts on this deal

[Eric S.]

Have been a long time reader and felt like joining the fun. Please see below for an opportunity that came across the desk today.

Price: ~$635K
Units: 9
Gross annual rents: ~$91,700
Taxes: ~$6,000

I'm screening at this point (above is what I know) - property looks nice from the outside, but I'm not very familiar with the area. Deciding if it is worth a drive by this weekend and further research. I'm in a large city and neighborhoods differ quite a bit.

Assuming 50% income / expense ratio, 5.5% interest rate, 25 yr amortization (balloon in 5 yrs unfortunately) and $100 cash flow per month per unit, the max loan is ~$475K. Taking less than that (~$455K) with a 20% down payment (~$114K), a potential offering price would be ~$569K (10.4% discount to ask) with 10.8% CoC return, 8.06% cap rate and 1.37 DSCR.

My commercial lender (portfolio) will do 4.5% interest rate (per a conversation today), but thought it made sense to model a bit higher...hard to know what rates will be like in 5 yrs - almost certainly higher. Given the lower loan balance than max, this property should provide $114 per unit per month pending all of the above assumptions.

IF you assumed the actual rate of 4.5% and loan balance of $455K, the CoC return would be 13.6% and DSCR would climb to 1.51 for the 5-year period. In a 6% rate environment, the cash flow per unit per month is $99 (DSCR of 1.30). In a 7% rate environment, the cash flow per unit per month is $67 (DSCR of 1.19 which is too low)...and so on.

CoC return and cap rates aren't huge and the interest rate risk in a slightly higher environment is worth consideration. There would obviously be much more work to do here, but given the above would appreciate your thoughts.