4 plex purchase @ 10% CAP? Thoughts? - Posted by Alex

import · January 20, 2003, 5:10pm

Posted by Alex on January 21, 2003 at 15:50:40:

Terry,
Thanks for the reply. This only helps justify why my first purchase was into a multipe instead of a single unit home. As for FHA loans, many people I spoke with said didnt reccomend it, there were way to many extra fees involved. I could be wrong…

thanks!!

import · January 20, 2003, 5:10pm

4 plex purchase @ 10% CAP? Thoughts? - Posted by Alex

Posted by Alex on January 20, 2003 at 18:10:36:

Ok.
Im very new to investing and have been reading up on as much as I can. I came across an investment property with the following numbers but dont know if im seeing my ~10% cap.

Purchase Price $150000
Expense $ 6247
Maint/Vacancy(15%) $ 3744
NOI $ 14969

I still dont know if I should finance with an 80/10/10 @ 6% on 1st and 2+Prime% on 2nd? or just put %20 down?

Also, is it me, or does this look like an “IDEAL” investment property?

Thanks!!

Alex.

import · January 20, 2003, 6:02pm

Re: 4 plex purchase @ 10% CAP? Thoughts? - Posted by ray@lcorn

Posted by ray@lcorn on January 20, 2003 at 19:02:06:

Alex,

You don’t say whether the numbers are real or estimated. If the latter, then make sure you get the real numbers before figuring your deal. I don’t know what you have incuded in the expenses, but make sure there is a provision for management. Also, assuming you’re using the magic 5% vacancy and collection loss figure, that leaves about $2,500 for maintenance. ($624 per unit per year) Without knowing the condition of the units I don’t know if that is low, high or about right.

In the first scenario, assuming 20 year amortization on both loans (which may or may not be the case, info not supplied), then the payments will be $10,317 on the first, and $1,316 on the second, leaving net pre-tax cash flow of $3,336, for a return on your $15,000 of 22%.

For the second scenario, assuming again your 1st mortgage terms are for 20 year amortization, then the payement remains the same ($10,317), but your net pre-tax cash flow will be $4,652, and the return on the $30,000 invested will be 15.5%.

If the amortization period(s) differ from my assumption you need to recalculate the numbers.

That makes a good case for the first scenario, but that’s not the only factor. In the first scenario the break even economic occupancy is 87%. In the second scenario the break even is 81%. Another way to say that is by using the lender’s measure of debt coverage ratio. In the first scenario there is $1.29 of NOI available for each dollar of debt service. In the second, the DCR is 1.45. On a small property the standards are in that range.

I’ll show you another way to look at it to demonstrate why small projects are very sensitive to vacancy and collection loss. In this case, the units have an average rent of $520. In your first scenario the cash flow ($3,336) is equal to one unit vacant for six months. That’s a tolerable margin for error in a decent market.

For more information on how I made these calculations and some food for thought, see my article at http://www.creonline.com/articles/art-203.html

Subject to hearing the actual amortization periods the deal could be a good one.

ray

import · January 20, 2003, 6:29pm

Re: 4 plex purchase @ 10% CAP? Thoughts? - Posted by Alex

Posted by Alex on January 20, 2003 at 19:29:41:

Hi Ray.
Thanks for picking up my posting.
Those “expense” numbers are accurate.
I was also able to factor in 15% which was a combination of Vacancy and Maintenace. The condition of the property on a scale from 1-5 (5 being highest) would be 3. Repayment schedule was going to be over 30 years. Now you took the assumption of 20years. Is there a benefit? If so, how and why?

import · January 20, 2003, 6:39pm

Re: 4 plex purchase @ 10% CAP? Thoughts? - Posted by ray@lcorn

Posted by ray@lcorn on January 20, 2003 at 19:39:35:

Alex,

I used twenty years because it is a common amortization term for investment real estate. You’d better get a quote from a lender before you count on the 30 year deal, and agreement for the seller on the same for his piece.

If the maintenance and vacancy numbers are real, then why estimate using a percentage? I wouldn’t combine those numbers by the way… you need to keep an eye on each.

ray

import · January 20, 2003, 6:57pm

Re: 4 plex purchase @ 10% CAP? Thoughts? - Posted by Alex

Posted by Alex on January 20, 2003 at 19:57:14:

Ray.
The property is my first home purchase as I do not own any other real estate.
The lender is granting this loan because I will be an owner occupent in this property. Im looking at the numbers from an income standpoint as if a family member was living there and paying rent.

In my original posting I listed “Expenses” and “Maintenance and Vacancy” on two separate line items just to show that it was being accounted for. As the latter can fluctuate I chose 15% as a safe number. Vacancy and maintenace are a bit less because the quality of the building and apartments are good and vacancy is low.

import · January 21, 2003, 11:48am

Re: 4 plex purchase @ 10% CAP? Thoughts? - Posted by Terry Heilman

Posted by Terry Heilman on January 21, 2003 at 12:48:38:

Alex,

Since this is also going to be your home you may want to look at a FHA loan with a lower down payment in order to keep your cash for reserves and unexpected expenses.

Terry

import · January 21, 2003, 11:11am

Re: 4 plex purchase @ 10% CAP? Thoughts? - Posted by ray@lcorn

Posted by ray@lcorn on January 21, 2003 at 12:11:38:

Alex,

My point about using a percentage is that you’re estimating, not using real numbers. To accurately value the property in it’s current status you don’t want a “safe” number, you want the real numbers.

ray

import · January 21, 2003, 11:57am