All Forum Posts by: Nick B.

A first position lender (the one that provides 75% loan) would not likely loan you money if you don't have "skin in the game", i.e. down-payment. You may raise that money from investors in form of equity.

As for underwriting, I can recommend a great book that explains it all. "Buying and Selling Apartment Buildings" by Steve Burgess. 

A lender would finance 75% of the purchase price. You need to come up with the other 25% plus closing costs and rehab money.

You need to learn how to underwrite properties before thinking of buying them.

If this is 506c offering, they will be glad you've published it. What if they gain more investors that way?

Yes, IRR. Although ARR (average or annual rate of return) can also be used.

A few thoughts:

• They want to double the rents. What are the current and market rents?
  
• What is the unit mix?
• Where is this property located?
• Economic vacancy of 3% on top of the double rent is very low
• Payroll of $14-15K is also low. Not even a part-timer would work for that

If I were you I would post the entire investor presentation

Like I said before, purchase cap rate is not that important. You need to start from your exit value and work your way back to the purchase price:

• Take current market rents and adjust them for 5 years hold (e.g. apply 3% annual growth). That's your future gross income
• Take current expenses, adjust them for your situation (e.g., property taxes may go up), and then project their growth in 5 years.
• Subtract future expenses from future gross rents and get future NOI.
• Divide future NOI by future cap rate and get future value.
• Subtract selling expenses, buying expenses, rehab money, and expected capital gains from the future value. The result is your offer price.

Cap rates going in are almost meaningless. What makes a difference is an exit cap rate. If similar properties continue to sell at 4.5% cap rate in 5 years and your NOI grows to $100K, you may reasonably plan your exit at 5% cap rate and get $2M upon exit.

If market cap rates increase to 7% you're sill in good shape at $100K NOI but not so much if your NOI is below $70K.

Can you grow NOI to $100K? That depends on how much you can increase rents and how you control expenses.

You did not mention expenses and financing. 

Rehab cannot be zero unless it's a brand new building. You need to bugget for unit upgrades up front and have that money available when a unit becomes vacant. 

Budget at least $5K/unit for a light rehab. 

The cap rate for this deal is between 4 and 5% depending on the expenses. Is it at, above, or below market? You need to ask local apartment brokers to for market cap rates. 

Why do you need a sales history for a sample package? Or even for a real package? What a subject property sold for is irrelevant and showing that history may spook investors when they see that the price keeps going higher and higher.

"Buying and Selling Apartment Buildings" by Steve Burgess