Multifamily, NOI, cap rates - how does anyone make cash flow?

12 Replies

I'm looking at a deal right now - 16 unit apartment complex. Asking price is 1,435,000 and the units have been recently refurbished. NOI is claimed at 100k making the cap rate 7%. Assuming someone put down 20% on something like this how much of that 100k of NOI is left after the mortgage payment? Would this thing even cash flow at all? I'm not seeing how, with a 1.1 million dollar mortgage payment (what terms are available - 30 years like a residential home)? Can someone explain how a place like would ever make you money if it's already improved and rents are already as good as they can get (and so is occupancy)?

Assuming your mortgage is at 5% rate and amortized over 30 years, your annual payment is a little over $70K. That leaves $30K a year cash flow.

7% cap rate implies that this is a B+ or better building. Is that so? What year was it built and where is it located?

There may still be room to improve NOI if the ratio of expenses to gross income is above 50%. For example, if gross is 300K and expenses are 200K there should be enough inefficiencies to cut expenses to 150K and improve NOI by 50K.

Do you have a detailed P/L statement from the seller? If so, post all income and expenses here and we'll see if there is any room for improvement.

Thanks for the reply, Nick.  :-)

Here is what I got from them for 2013:

and here is what I got for 2014:

I also see that the deed transferred October last year at roughly 1 million.  So someone grabbed the property at 1 million, made improvements (added security gates, repainted, redid interiors of units, etc) and now is trying to get a premium price for it.  The unit was built in 1958.  I'm not sure what would qualify as class A or B+ but I seriously doubt this would qualify as A; I walked it yesterday and took videos and photos and it's in a bit of a "barrio" feeling area - not (1/2 mile) far from much nicer apartments that rent for around 1100-1200 for 750sf or so places.

Any help appreciated...

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Paul your COC return is based on how much you have to put down for LTV.

I don't look at any properties where an investor bought it recently, lipsticked it, and has no stable long term history and wants a 7 cap. Actually with the expenses they are claiming it is a lower cap.

Now if I was buying an amazing asset with a long history 5 + years of performing and immaculate books then I can predict to a certain degree how it will keep performing in the future. The problem with these sellers is they buy something in you said October from what you can tell. Now they have leased it up and rented it out but likely only have 3 to 6 months at current occupancy levels for history. You go to a bank and they say it can go from 90% occupied now to 60% after you own it because history is to soon. The seller could have put questionable tenants in with rent credits to fill it up. The banks says because of this they want 40% down instead of giving you 25% which affects COC. You could go to the seller to hold a second but on most of these type deals that would eat up their equity they are wanting to cash out on. This is why I like sellers instead that are older and retiring and have a ton of equity in the buildings. They are more open to structure deals that work better for the buyer.

This property seems like the seller is looking for a sucker to buy it. I see people buy crap deals all day long and sellers will gladly sell it to them.   

1958 I don't like that vintage as it comes with a ton of issues mainly galvanized water mains and tons of other stuff. You would need to check if problem era materials have been replaced and what the last decade was. That all proper permits have been pulled over time etc.

Apartment buildings are great and they also have so many moving components that factor in the returns. Sometimes its all capped out and overvalued and sometimes there are huge opportunities for growth that are not being utilized such as adding a laundry facility, vending machines, garage parking, storage etc etc etc. 

An apartment building like you are describing may have many later ownership advantages on the back end v/s the cash flow from the start on the front end. It really depends on the property value increase percentages in that properties market year to year, the % rent increase values per year in that area, and your investment strategy as well. 

If the property is in a high growth area, stays occupied, and is now low maintenance after rehabbed then it might be a great investment. I have recently researched these types of loans because I have been looking to buy more multi units as well and I have not purchased in a while. They do offer 30 year loans and some 35 year loans for this type of property. The loans are really different compared to residential.

If your tenants pay the mortgage for 5-10 years and you break even each year then sold it you would still gain on your equity but it depends on how you invest and the opportunities in your area. Some people would just buy this for a tax write off and differed gains, not If this would be a long term hold and there is room for rental income growth each year then you would gain cash flow each year while the asset pays for itself thus building in cash flow and value. 

Some people will refi a place like this every couple years to buy more properties once the equity is there or they will refi the remaining 25 year debt amount for another 30 therefore creating cash flow after 5yrs. To some, not all, this is their investment model and they have the money to do it. They are just looking for a place to park their $$ for tax purposes and future return on investment.

Be sure you see actual #'s on this b/c as Paul stated above there is always maintenance costs that are "properly in line" for the age of the asset, even if rehabbed.

Myself I need cash flow right up front or its not worth my time but it varies for every market and investor. Some people are more risky than me but I like a safe investment.

Check out Ken McElroy here on BP, he has a lot of material and knows his stuff!!!! You might figure out more from him on this answer than anyone on BP can offer.

Here are some links that might be of help also.

As has been mentioned before there is something wrong with the expenses.  I would expect them to be about $20,000higher.  You have closer to a 5% cap property than a 7%.  If your cost of money is 5% this is not a good deal.

Good Luck.



I live in the next town over from you in Prosper.

I have an issue with the way they state potential rent, without a vacancy factor.  They are implying that they are 100% leased up which I have trouble believing.  A lender will use a vacancy factor to the market area and down grade your loan to value.


I do my building evaluations backwards to you (or maybe you do them backwards to me :) ).  I don't work the numbers based on the price and then try to figure out the cash flow. I start with cash flow and then figure out the price. The seller's asking price is irrelevant.

Decide what kind of cash flow you want from your building. Say $200 per month per unit, for example. If the NOI is $108k, then on a 16 unit building, you want to take 200x16x12= 38,400 a year. Now the NOI, aka debt coverage, you're working with is like $70000, or $5800 a month. That determines how much debt the building can support, and therefore determines your offer price

If your loan terms are say 5%, on 30 years (adjust for more realistic numbers) then your building can support 1.08 million in debt without hitting your cash flow and other numbers. with a 20% down payment, your max offer is 1.35 million (provided you're using the arbitrary numbers in my example). Don't offer to buy a building unless you already know your cashflow. And have a cash flow threshold that you establish before worrying about the asking price.

All commercial (5 units +) loans I know of have a max of 20-yr term with 5 year call / adjustment in rate.  If you have to get a 30-yr to spread the payments out more to maybe break even, no way.  Sounds like a deal for someone seeking losses or without knowledge.   You can earn 5% about anywhere without the hassles of tenants and buildings.   Figure out what will work for you, educate the seller and see if they come down.  Otherwise definitely move on.

Originally posted by @Steve Vaughan :

All commercial (5 units +) loans I know of have a max of 20-yr term with 5 year call / adjustment in rate.  If you have to get a 30-yr to spread the payments out more to maybe break even, no way.  Sounds like a deal for someone seeking losses or without knowledge.   You can earn 5% about anywhere without the hassles of tenants and buildings.   Figure out what will work for you, educate the seller and see if they come down.  Otherwise definitely move on.

 What is your average returns or cap rate then on your properties?

Originally posted by @Eran Greenburg :

 What is your average returns or cap rate then on your properties?

Cap rate is totally independent from the buyer and the way of financing.  

I think that makes it simpler for me though to use cap rate, not only because I would be using all cash to buy, but because it helps me evaluate the properties independently of other factors, like how good their loan is. 

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