I backed into an asking price of $4.9 million based on 84 units at an average price of $58,333. At that price, you need to kick in $1.5 million.
I get these numbers (monthly):
Gross scheduled rent: $64,455
Stated income: $56,598
vacancy rate: 12% (perhaps some of this is economic, e.g., "one month free rent")
Computed expenses: $23,621
Stated NOI: $32,976
NOI / Gross rent: 51%
Very close to the 50% rule of thumb. The vacancy's higher than they state, though, so expenses might be low. But I'll go with these numbers, since they're in the right ballpark
Loan payment: $20,167 (calculated at 5.9%, 30 years, $3.4 million, see below)
Cash flow: $12,810/month, $153,713/year
I'm not sure about the loan payment. I'm assuming the $3.4M is the original loan to get to the payment. I'm guessing there's a 10 year balloon and the seller is 1.5 years into this loan. That would make the current balance $3,335,236. Please clarify the situation with the loan.
Based on the asking price and a down payment of $1.5 million, your cash on cash return is only 10%. If I use the typical calculation, and compute the payment on $4.9 million, your cash flow per unit per month is only $47.
Now, you seem to be wanting to pay $3.57 million based on the assuming the loan plus $170,000 down payment. That would give you $140 per unit per month, based on the payment on the full amount. Quite nice.
Now, plugging in your actual terms, a $3.4 million loan plus $170K in cash, I get $152/unit/month and an annual cash flow of $153,716. That's a 90% cash on cash return. Woo hoo! Sign me up!
Now, I'm pretty doubtful the owner would drop his cash desired from $1.5 million to $170K. He's giving up 90% of what he wants. So, lets see what a more realistic price would be. If the price were $4.1 million, financed 100% at those terms, the cash flow per unit per month would be $103. If you put in $700K in cash, which is still less than half what he wants, you cash flow per unit per month remains at $152 a month, $153K per year. With the $700K put in, you're getting a 22% cash on cash return. To me, that would be an acceptable deal. Notwithstanding the fact I don't have $700K to plunk into the deal, of that the owner may or may not be willing to sell at that price.
The usual caveats apply:
1) Is the demand really there? Looks OK from the vacancy numbers, but 12% is a bit high, and you need to be sure the owner hasn't stuffed the place with tenants on special deals.
2) Is the value really there. If you can buy any apartment building with five miles for a similar price, this isn't a deal.
Jan 22 '10, 08:24 PM
