Deal Check And Process - 7-plex
I'm looking to get my first property and I am comfortable with the size of the deal. I'd like to get a reality check on it though. I do have a local Buyers Agent that will give me a reality check, I'll be contacting an attorney today to draw a contract.
The numbers I have look great so I'm going to put a property under contact and then do my due diligence.
Based on the listings for other multi-units the cap rate is 10. I'm looking at a 7-plex, 100% occupied, supposedely well maintained (due diligence later) and I believe a motivated seller.
The numbers. Asking price of $250k and a GSI is $50k so this gives me a Cap rate of 5.
Once I have it under contract today I will have the property appraised and inspect the major items like heating system and the roof. I'll also get statements and rental contracts neded to verify rent, maintenance and monthly/yearly expenses.
Am I on the right path?
Also, while this property offers the best cash flow, this owner has a handfull of multi-units with similar numbers. She is looking to sell them all! I have the cash, but am I being overly ambitious in wanting to pick up a few of them?
Thanks,
Dan
[ Edited by dbullock on Date 04/20/2004 ] Update: found a broker/lender that will do 30 year fixed for 25% down.. rate still to come. They only do this package on comemrcial props from 1-8 units.
[ Edited by dbullock on Date 04/20/2004 ]
Cap rate is a percentage found by NOI/Price. Higher caps are better than lower caps.
In your case, your GSI is 50K. I'm going to assume that vacancy and expences account for 35% expenses (of the GSI). I'll figure 6.5% financing, and 25% down payment. Based on that, here's a quick analysis.
cap 13%
dscr 3.13
GRM 60
yearly cash flow: 17,500
ROI: 28%
NOI: 32,500
IF these assumptions are correct, then it looks like a decent buy. How much will it be worth in a year? Is it a good deal or a FMV deal? Keep in mind, by writing out a check and using your own money you're decreasing your ability to do future deals in the same way. That's not necessarily a bad thing, but you'll have to learn how to either make more money to put down on future deals OR learn how to do deals with other people's money and credit.
Keep us posted.
ok.. I'm trying to learn all this quickly
The probable sale price would be $245k. Once we are under contract I would have inspections and I would expect to get 10-15k back at closing for deferred maintenance.
Gross Scheduled Income is $51,120
Gross Income (95% occupancy) is $48,564
Total Expenses is $18,864
NOI is $29,700
Cap rate is 12.12%
The greater upside is the potential of the property. It's the worse looking building around and rents are low for the area. I expect to put $10-$20k in improvements and raise rents a total of $360/mo or $4,320/yr which increases the property value by $43,200.
Also, the heating is gas and is currently paid by the owner and this expense is $5500/yr. I will convert this to metered gas or to electric baseboard heating. So this would remove about $4,000 from expenses.
Appreciation in the area over the last years has been 5%,5%,5% and last year was 15%.
Any thoughts? Does the logic seem correct?
Thanks,
Dan
Also.. the appraised value is probably about $252k.
My plan is to improve the property and to sell it in about 12-14 months. I will then use the proceeds to take on a larger building. Probably use a 1031 for this.
I'll have a good attorney for it by that time.
Dan