Analyze This...deal???

Here's the skinny-

85 units
71% Occupancy
NOI 148,991 (Actual NOI from his package, however spreadsheets I got showed Actuals of 124,051)
Price $1.6M

He will owner finance 78%, meaning he wants cash down of 22% ($352k).

What's the verdict on both NOI scenarios (the Actual from the package, and the Actual I analyzed based on his P&L's)?

Deal or no Deal?

Edited: 06/26/2010 at 10:33AM by Daniel Yoo

Uwe S.

Real Estate Investor · Chemnitz, Saxonia

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Icon_minipost Nov 17 '09, 03:25 AM

Daniel,

Few infos here, but no deal for $1,6M. On the actual NOI $124k you have a CAP of 10% with $1,24M, with the downpayment you reach the CAP Rate, but a price of $1,45M is better with 25% down.

-Uwe

Edited: 06/26/2010 at 10:33AM

Daniel Yoo

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Icon_minipost Nov 17 '09, 07:07 AM

Uwe,

What's your criteria for a deal on the basis of Cap? 8.5%+?

I know he is selling it at a premium, but in order to get what I want (seller financing), I need to give him what he wants (cash and full price).

Edited: 06/26/2010 at 10:33AM

Uwe S.

Real Estate Investor · Chemnitz, Saxonia

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Icon_minipost Nov 17 '09, 07:14 AM

Daniel,

Thats clear, with seller financing you have to pay more, but mind a CAP of 10%+ is that what you need, not the seller financing alone. When you buy for a bad price, you lost your down payment perhaps faster then you will.
And 71% occupancy is not a stable percentage, so you need more money for buildup this aparment complex.

-Uwe

Edited: 06/26/2010 at 10:33AM

Loc R.

Note Investor · Pasadena, California

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Icon_minipost Nov 17 '09, 07:40 AM

Daniel,

$124,051 / $1,600,000 = 7.75% cap rate

As for the cash-on-cash/ROI calculation, what are the terms in which he'll carry the paper for?

What is the upside in this property? What do you think the pro-forma cap rate can potentially be? Why is it at only 71% occupancy?

Edited: 06/26/2010 at 10:33AM

Loc R., Individual/Private Note Buyer
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I buy individual notes - all states, shapes & sizes.

Will Barnard

Rehabber · Santa Clarita, California

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Icon_minipost Nov 17 '09, 08:38 AM

Your are lacking a ton of info for us to analize this properly, however, 85 doors for $1.6M = $18,824 per door which is very cheap. Is it in the ghetto? What are the average per door monthly rental rates? I can estimate by backing out the numbers, but the unit mix could make a difference. Which reminds me, what is the unit mix?

Going off actuals only which is all that really counts: $124,000 NOI / $1.6M is only a 7.75% cap which is way too low, ask price too high. Again, this does not take into consideratiuon the upsides to capital improvements (what are the repair estimates/condition of property) and occupancy stabalization.

The number you are missing which is a high factor is the gross income. Anybody can jive a NOI, what is the gross?
At 70% occupancy, we know that the OE will be well over 50%. Looks like an overpriced deal from the info provided, does not mean it is a loser though, depends on the balance of the info.

Edited: 06/26/2010 at 10:33AM

Will Barnard, Barnard Enterprises, Inc.
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Daniel Yoo

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Icon_minipost Nov 17 '09, 09:32 AM

Thanks for the reponses, this is what makes the forum such a great resource.

Ok, here we go...

Originally posted by nationwidepi

Your are lacking a ton of info for us to analize this properly, however, 85 doors for $1.6M = $18,824 per door which is very cheap. Is it in the ghetto? What are the average per door monthly rental rates? I can estimate by backing out the numbers, but the unit mix could make a difference. Which reminds me, what is the unit mix?

Going off actuals only which is all that really counts: $124,000 NOI / $1.6M is only a 7.75% cap which is way too low, ask price too high. Again, this does not take into consideratiuon the upsides to capital improvements (what are the repair estimates/condition of property) and occupancy stabalization.

The number you are missing which is a high factor is the gross income. Anybody can jive a NOI, what is the gross?
At 70% occupancy, we know that the OE will be well over 50%. Looks like an overpriced deal from the info provided, does not mean it is a loser though, depends on the balance of the info.

This is not in the ghetto. Solid rental market of blue-collar tenants, class C area. Market rents for a 1/1 are $410. Current rents are under market at $395.

Unit mix: 45, 1/1; 40 2/1.

Gross Rental Income: 270k

Originally posted by SolidReturns

Daniel,

$124,051 / $1,600,000 = 7.75% cap rate

As for the cash-on-cash/ROI calculation, what are the terms in which he'll carry the paper for?

What is the upside in this property? What do you think the pro-forma cap rate can potentially be? Why is it at only 71% occupancy?

6%, 30 year terms, no balloon.

Upside will be in raising rent and occupancy.

Proforma (assuming market rents and at 90% and 95% occupancy respectively) would be 12.2% CAP and 12.8% CAP.

The owner has neglected this, he has properties in the East coast that he focused on more.

Historically, occupancy was as high as 93% (August '08-April '09). But from his rent rolls over 2007-2008, he has been consistently at 89%. Since Feb of this year, occupancy has steadily decreased and currently is the lowest it's been in the past 2 year rent rolls that I've seen.

Originally posted by Uwe Siegert

Daniel,

Thats clear, with seller financing you have to pay more, but mind a CAP of 10%+ is that what you need, not the seller financing alone. When you buy for a bad price, you lost your down payment perhaps faster then you will.
And 71% occupancy is not a stable percentage, so you need more money for buildup this aparment complex.

-Uwe

I understand that a CAP of 10%+ combined with seller financing would be a great deal. Unfortunately, I haven't been able to find any. The deals I've seen with owner financing have generally been around 8-8.5% CAP.

Edited: 06/26/2010 at 10:33AM by Daniel Yoo

Loc R.

Note Investor · Pasadena, California

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Icon_minipost Nov 17 '09, 09:47 AM

78% of $1.6M, 30 years @ 6.0% is $7482 a month.

x 12 months = $89,784

So...$124,051 - $89,784 = $34,267 NOI after debt servicing

and

$34,267/$352,000 (down payment) = 9.73% cash-on-cash return.

How much experience do you have in turning around large apartment complexes? For a 7.75% cap rate and 9.73% cash-on-cash return, I am hoping you have a great game plan in place.

Since this seller sounds like he's game to creative financing, may I offer up another suggestion? See if he'll take a 90-day (or even 6 month) moratorium on payments while you turn the place around. That would let you keep more capital in the event that you run into unexpected expenses.

Edited: 06/26/2010 at 10:33AM by Loc R.

Loc R., Individual/Private Note Buyer
E-Mail: locatelli.rao@gmail.com
Website: http://www.lrprivatenotebuyer.com
I buy individual notes - all states, shapes & sizes.

Uwe S.

Real Estate Investor · Chemnitz, Saxonia

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Icon_minipost Nov 17 '09, 04:14 PM

Daniel,

I wrote this in another topic and a write this here again, when you have $350k for a downpayment. Then take these money and put it in smaller complexes. I donÂ´t know where is your area yet, but it gives more possibilities than a 85 unit complex for $1,6M.
You can split the money 33/33/33 ($115k) and seek buidings for max $350k or you split 50/50 ($175k). IÂ´m sure you find better deals when you be flexible.

-Uwe

Edited: 06/26/2010 at 10:33AM

Dan Koch

Real Estate Investor

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Icon_minipost Jul 05 '10, 02:43 PM

Depending on the reason for low occupancy @ a 7.5% cap and 71% occupancy there is a big upside for capital improvements and having a great deal.

If poor management is the reason for low occupancy then @ 1.6mil I would say it is a good deal.

If it needs a lot of Capital improvements and $$$ out of pocket to bring the occupancy rate back to a respectable/stable percentage 90-95%, then you are going to want the owner to carry more.