Posted by Rick on October 30, 2007 at 22:26:39:

You may not need one. The calculations are pretty straight forward at least to give you a general feel for the deal. I would strongly suggest that you get Ray Alcorns book, The Dealmakers Guide to commercial Real Estate. Whithin a week you will feel `100% more confident on making decent decision and knowing what to expect.

Here are some simple calcucations and terms in order to get a good feel for this deal:

NOI = Net Operating Income = Gross Income minus all expenses (except debt service) – this let’s you know the cash flow that this property will give you before paying the debt you owe on it and income taxes.

As you saw in your other post, when not supplied with exact figures, it’s safe to make an estimate of 40% operating expenses. This means that 40% of the monthly income will go towards paying the operating expenses of the property. Some are more…others less. But it’s a safe way to give yourself an idea if a deal is even close to what you are looking for.

CAP RATE = Capitalization Rate = NOI / Purchase Price – this is commonly used in real estate (one of many factors) in order to define the deal. Most people like to see a 10% cap rate (or close to it) in order to see that a project is worth the effort.

So…let’s take a look at your numbers:

Monthly Income = 3,800
Estimated Operating Expenses = 40% of 3,800 = 1,520

NOI = 3,800 - 1,520 = 2,280 x 12 months = 27,360

You could do two things here, figure cap rate, and look at what you would pay for debt service monthly. Let’s start with the cap rate:

27,360 / 260,000 = 10.5% cap rate

That’s not bad. Now let’s take a look at your debt service. You’d have to come up with 20% deposit, so your deposit would be 52,000 leaving you a loan of 208,000 to pay off. Using the loan calculator on the page above, on a 20 year mortgage at 7% you’d be paying \$1,612.62 a month. So, let’s take a look at the cash flow:

1,612.62 X 12 months = 19,351.44

NOI 27,360 - 19351.44 = 8,008 Positive cash flow.

So, on this deal, as it stands, you would probably make \$8,008 a year. On a \$52,000 initial investment it would return a 15% cash-on-cash return. Can’t beat that in the bank!

The only other thing that is left out is where you got the 52,000 for the deposti - did it come from a Line of Creidt with interest? or hard money lender? or Home Equity Load? etc…all of those you have to take into consideration the repayment of that debt service as well.

Hope this helps you. If you read through Ray Alcorns book you will find all this information in much better detail (that’s where I got it from!).

Good luck on this deal…if all things pass your due diligence it looks like a nice one.

Posted by Doc_CJ on October 08, 2007 at 11:00:09:

The property has 3 commercial rentals in the first floor, and has 3 units on the second floor.
Property is selling for 260,000, 6 years left on commercial lease on all 3 of them.
Income= 3,800.00
Better right???