rookie: analyzing 10-unit vs SFH? reading the proforma?

[Adam L.]

So I've read a lot about SFH calculations and worksheets and trying to figure out if they are good deals, but I'm thinking I want to jump into a larger project. I've come across a 10-unit building in a nearby close city asking $1.6M. Curious if anyone could help and earn some good karma?

It's a stand-alone building with 10 units.. 

Asking price:  $1.6M: 35% downpayment, 30yr term, 4%: -$58,650/yr

Gross Rental: $112,200/yr

Net rental w/ 2% vacancy: $111,156/yr

Total Operating Cost:  $33,227/yr (utilities, maintenace, taxes, 6% management, etc)

Net Operating Income: $77,929/yr

Less Mortgage: $19,278/yr

[Jaysen Medhurst]

I wouldn't be interested in this property unless there is an opportunity to force appreciation or it's a very good market with the expectation of strong rent growth, @Adam L.

What is the prevalent cap rate for similar properties in your area? I think you need to re-run your pro forma, apply that cap rate, and see what kind of value you come up with.

To pick up on @Brian Anderson's points:

• 2% Vacancy is very low. I use 8% for MFR.
• I don't understand your rent assumptions. The numbers under "Market Rent" are 1/2 what the actual rents are? That doesn't make any sense to me.
• Getting quality Management for 6% for so few units sounds very optimistic.
• With Commercial properties, you can just plug in an expected appreciation number and let 'er rip. You have to determine your expected rent and expense increase each year and then see how the numbers play out over time, 5 years say. Since commercial properties are not valued based on comps, it doesn't matter how much the "market appreciates." That will affect Cap Rates, but leaves out the very important NOI component.
• DSCR is usually communicated as a number, not a percentage. I.e., 1.33 not 133%.
• You need to include some budget for initial repairs. There's always something!
• The bank will insist on 6-12 months of reserves (PITI) at closing. Factor that in.
• $34/month for landscaping? Does not sound realistic.
• $105/month for insurance on a $1.6MM property? Come on, man.
• I'd worry about those taxes, too. They look low and a sale may trigger a re-assessment in your area.
• 3% for Repairs and Maintenance? Nope, no way. Double that. I know those are "actuals" and the current owner likely kept them minimal because he knew he was going to list the property.
• What about CapEx? I don't see that in your analysis. Probably another 6-8%.
• That gas bill is significant. What does it cover? Anyway you can find a way to shift those costs to the tenants or lower them significantly? Getting rid of that expense would create ~$75k of value right off the bat.
• Does the owner pay for trash? That's usually the case in building this size.
• What about pest control and admin/professional fees?
• Figure out your Internal Rate of Return (IRR). That's an important metric that you need to be considering.