Posted by Jim Rayner on February 15, 2003 at 15:44:13:
Jason,
There’s not a enough information here to even begin an evaluation.
However, I wouldn’t spend anymore time on this one at the price they are asking. This one wouldn’t get past my first test, that being gross rent multiplier. The GRM here is 7.55 which is way too high in an area described as not the best. Something more in the 4-5 GRM would more likely be a deal worth looking at. Looks like the current owner overpaid as well. Don’t make someone else mistake your mistake.
Have available to me a 12plex 2 2ba, 5 1ba, 5 studio. Asking is 435K gross 4800mo with a 65mo phone contract and 85mo laundry contract both can be ended at any time. So gross would be 4950. The terms are 25K down he’ll hold for 18mo at 9%. The property is not in the best area and all the tenats are on month to month but at least 3 have been their for over 1yr. the condition of the place looks ok from the outside bc he just had it painted. He has held it for only 10mo and will to sell at the same price. Can any one help me evaulate this deal
Re: first comm deals here is the # - Posted by ray@lcorn
Posted by ray@lcorn on February 15, 2003 at 17:07:02:
Jason,
I agree with Jim. This doesn’t sound like it’s worth even looking at unless you just want the practice of making a lowball offer. You gotta wonder why the seller wants out so soon and is offering such amenable terms. Once you look at the numbers below you’ll see why he wants out.
Here’s how I run through the numbers given:
4800 x 12 = 57600
57600 x .55 = 31680 NOI
(the .55 multiplier allows for 40% expenses and 5% collection and vacancy loss. Probably more realistic is a 10% v&c loss)
31680/435000 = 7.3% asking cap rate
For a property with 75% turnover and in a bad part of town, an asking cap of 12% would be the lowest it could hope for, 15% wouldn’t be out of line, and then subject to deductions for deferred maintenance. At a 12 cap, the value would be calculated thusly:
31680/.12 = 264000
That gets you to the same place as Jim’s GRM.
264,000/57600 = 4.58 GRM
Even if the financing is interest only, you’re in a negative cash flow from the start.
410000 x 9%= 36900
31680 - 36900 = (5620)
You might want to read an article I wrote called “100% Financing: Feeding the Desire to Acquire”. It’s in the Articles section of this website, and the direct URL is http://www.creonline.com/articles/art-203.html
Your seller sounds a lot like the owner I used for an example in that article. Hope this showed you a little bit about how to look at a deal.