I have a deal that I have analyzed with a 9.55 cap rate. All the properties within this portfolio are rented. I am just starting back up and need to know if I should proceed or "due" more diligence. I am going to start with an option to purchase that allows that opportunity, but I don't want to lock myself into an unreasonable offer price until I am confident in the right number to offer or walk away. Any help? Suggestions? What do you need from me? Thanks in advance for the help.
Originally posted by @Karl Sannicks :
I have a deal that I have analyzed with a 9.55 cap rate. Any help? Suggestions? What do you need from me? Thanks in advance for the help.
Show up your cap rate analysis and the analysis of your two best cap rate comps.
Please share your numbers / analysis if you will. It will get more attention that way...
To me "personally" cap rates are worthless! As I focus on cash to cash earnings. It is more important on what I make on my money than what I would make if it was a cash sale because "I" highly leverage my home.
Therefore I agree with the other posters you need to give more details and costs.
@Karl Sannicks If you've calculated a cap rate to "9.55%" you probably know what you're doing. Did you account for taxes, insurance, management, maintenance, utilities, repairs, and vacancy? If you provide more details we can help double check the numbers but you probably know enough in order to proceed.
Normally I'd say make an offer and have it accepted before doing more due diligence. Your offer is based on the seller's declarations or realistic assumptions in case any info is missing. I think it's not a good use of time to do any more work than this until you have an accepted offer. Once you do, then you can spend the time to make sure the numbers really add up. If they don't, it's perfectly acceptable to go to the seller and renegotiate.
I don't have experience with an option to purchase. Maybe you start with an LOI. Make sure you include language to give you a due diligence period. If the seller finds that acceptable, do the extra work then. Either way it should look kind of like this: initial analysis, accepted purchase agreement or LOI, full due diligence, renegotiation if necessary, execution of contract.
Thank you all for the replies to my posting. I used the BP rental property analysis tool.
Here are the particulars on the deal: 10 SFR properties, asking is 599,900 with purchase offer at 575,000 after initial negotiation. Originally offered 509,000. If all homes sold for last purchase price, portfolio would go for 587,791. 5 SFRs are 3bd, 2ba. 5 others are 2bd 2ba. All remodeled in last 2 years. All are rented and there is room for rental increase. I attributed a vacancy rate of 15 percent in my analysis being ultra conservative to protect myself. Utilities paid by renters.
Total Rental Income/mo = 8724
Vacancy = 1308
Property Taxes/mo = 625
Repairs = 872
Management = 698
Insurance = 643
NOI = 54,925
Monthly Cash Flow = 4577
Cash on Cash ROI = 9.51%
Cap Rate = 9.55%
@Andreas Mirza - I am used to LOI's as well, especially for MF purchases, the option to purchase is very similar and gains the same result.
Again, thank you all for your comments and feedback. Hope this helps and I thank you for helping me. Let me know if you need more information. Thanks!
Since they are sfr's why don't you additionally comp out the homes and offer some kind of discount for a bulk sale The taxes and insurance are very low, what is the average age of the homes and did you budget for near term future cap ex projects I am envious of the cash flow Good luck
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