Updated 3 months ago on . Most recent reply
Evaluating a Commercial Real Estate Deal
I am debating a property in Clearwater, Florida (downtown, not far from the beach). Most metrics look great! However, I am trying to reconcile if the cash on cash return for $186K initial investment is worth it. Would you guys walk away from this deal or jump on it? I would appreciate any guidance y'll can offer in helping me make a decision.
Context
- 5 units are 1/1, 2/1, and 3 studios
- It is Clearwater, FL in downtown
- I am not particularly worried about maintenance/finding tenants given how impeccable the property is (had my contractors check it out) and tenant rent roll is strong (it rents well
- list price: $650K
Things that give me pause
- tying up $186K in the real estate for a 3% cash return in the short term
- I am bearish on long term appreciation for the downtown Clearwater market (it is a weird vibe)
- I prefer buying in St Petersburg, FL but would I would have to accept subpar metrics (DSR/cash flow/etc) in exchange for good appreciation upside
| Assumption | Pro Forma | Actual | ||
| Gross Rents | $ 89,400.00 | $ 84,600.00 | ||
| Vacancy | 10.00% | $ 8,940.00 | $ 7,614.00 | |
| Prop Mgmt | 0.00% | $ - | $ - | |
| Cash Reserves | 3.00% | $ 2,682.00 | $ 2,538.00 | |
| Taxes (actual) | $ 11,000.00 | $ 11,000.00 | ||
| Insurance (actual) | $ 11,000.00 | $ 11,000.00 | ||
| Maintenance + Utilities | 8.00% | $ 7,152.00 | $ 9,550.44 | |
| Operating Expenses | $ 40,774.00 | $ 41,702.44 | ||
| NOI | $ 48,626.00 | $ 42,897.56 | ||
| Mortgage | $ 37,593.68 | $ 37,593.68 | ||
| Cash Flow (NOI - Debt) | $ 11,032.32 | $ 5,303.88 | ||
| Cash on Cash Return (Cash Flow / (Down Payment + Closing)) | 5.9% | 2.8% | ||
| Cap Rate (NOI / Purchase Price) | 7.5% | 6.6% | ||
| Gross Rent Multiplier (Purchse Price / Gross Rents) | 7.27 | 7.68 | ||
| Operating Expense Ratio | 46% | 49% | ||
| Debt Service Coverage Ratio (DSCR) | 1.29 | 1.14 |