help me crunch some numbers, #1 - Posted by Don

Posted by Commercial Investor on March 23, 2005 at 12:14:46:

Where is your property located? A cap rate over 10% is hard to find these days.

help me crunch some numbers, #1 - Posted by Don

Posted by Don on March 22, 2005 at 11:22:42:

I use a spreadsheet I deveoloped to evaluate potential multi properties, and derive offer prices. So far all the entries have generated offering prices WAY below asking prices… I need some sanity check here and will post a couple of examples of what I am doing. here is example number 1:

price 299000
monthly gross 4550 * 0.85 (allow 15% for vacancy and management)
tax 3720
insurance 1418
utes 9234
water 3840
maintenance (including reserve for replacement) 5460 (I use 10% of yearly gross or 1 month of gross based on my best guess)

NOI $22738
cap = 0.078
target cap = 0.11 (i shoot for 0.1 to 0.11 based on the neighborhood profile)
offering price therefore = 206709
and based on debt service of $6.82/K/month, this leaves me annaul cash flow of merely $5820, which isn’t the moon I am shooting for here.

So you veterans out there, is there any numbers/assumptions above that doesn’t make sense? or is the current market condition so out of wack? or are too many wonnabe investors out there bidding the properties up so they can own at negative cash flow?

feed backs appreciated.

Re: help me crunch some numbers, #1 - Posted by Atlanta_bob

Posted by Atlanta_bob on March 23, 2005 at 22:09:55:

Hi Don:

This is just my 2 cents, so don’t quote me.

  1. Your utility expenses (including water) is killing this apartment complex: $13,074 (= 55% of all expenses!). Don’t know how many units are in this complex, but you’ve got to pass-on those expenses to your tenants to make this work. Perhaps, re-meter every unit so tenant pays those utilities. With those numbers, your expenses are 51% of Effective Gross Income (EGI). Gotta get that number lower.

  2. If utility costs are cut in half, or you bump the rents by 15% (select either one), then your cap rate approaches (your desired) 10%. Run the numbers to confirm mine. More importantly, your Debt Service Coverage Ratio (DSCR) changes from 1.19 to 1.54, assuming you actually pay $299,000 and put 20% down at 7% interest rate amortized over 30 years. Most lenders want DSCR above 1.20 so they know you have enough cash-flow to pay their mortgage.

  3. If you buy it at full price and have those income & expenses, then your pre-tax cash flow is only $3,641. Why even bother!

  4. Anyway, if you pass-on 50% of utility costs to tenants or bump their rents by 15%, your pre-tax cash flow should be slighty above $10K for a cash-on-cash return near 17% (at 20% down). Not bad!

Now, if you can buy below $299K and still pass-on most utility costs to your tenants (i.e.: increased rents), then the deal starts looking sweet!

Hope this helps.