Need help analyzing a commercial RE deal

2 Replies

Hey BP folks - so I'm considering my first commercial RE investment (5 units).  Here's the basics:

480k price, 25% down

60k annual rents 

6k annual taxes

3k insurance

3k utilities

Good location, low vacancy rate (assuming 6%)

Here's my big question - how do you think about the likelihood of rising interest rates?  I can probably get 4% now with 20 year amortization and a 5-year bullet, but do you all price in a higher interest rate, given where rates may be 5 years from now?  Should I use a 5% or 6% all-in blended rate for the analysis?

It looks decent on paper, but I'm wondering what I may be missing.  Any other thoughts on this deal would be greatly appreciated!

Hi @Darren S.

Rent Assumptions 

A) Monthly Rent Revenue  = $5000 (5000*12 = $60000)

B) Vacancy Rate = 6%  ($3600)

C) EGI =A-B  i.e. 56,400


A) Property Taxes = $6000

B) Insurance = $3000

C) Utilities = $3000

D) Property Management = 10% $5640 (I assume you are going to say I don't need property management I will manage it myself. That is good. But still account for PM as 2-5 years from now when you have multiple properties you will at some point have to transfer your responsibilities to property management. It's better to account for it now so you know your property cash flows from day 1 including all expenses)

E) Repairs & Maintenance = 6% each i.e. 6768

F) Total Opex = 24,408

NOI = 56400 -24408 = 31992

Debt Service = 4.25% term 20 years ~$32498

Cumulative cash flow = NOI - Debt Service = 31992 -32498 = -506

Based on the assumptions above the property wont cash flow. Now in regards to your question about interest rates. I always look at Interest Carry Ratio  - This ratio gives investors an idea of the maximum interest rate that a loan's cash flow could carry. (source Investopedia). In your case this would be 8.9% that is the maximum interest rate your loan could carry. 

Another thing that you may find helpful:

Wells Fargo - Has a program for commercial properties (5Units > )where you can get a fixed interest rate for a 15 year/20 year term as long as the maximum loan amount does not exceed 750K. So you can lock in an interest rate for your property 4-5% today. (Full Disclosure - I am not affiliated with Wells Fargo in any way or benefit in any way). Some other banks also offer the same program so do you research and due diligence. 

You were missing a couple key items Property Management, Management, Repair Rate etc. I would try to get this at a lower price point. Hope this helps. 

Good Luck! 

My big concerns with that property would be property management and resale.  Do you have a good property management company that you can use?

Re-sale will be a challenge because the property is multi-family, but too small to do onsite maintenance.  That said it may be in a sweet spot for cash flow due to these challenges.

Your interest payment will be 1200/month at the beginning of your loan.  If rates go up to 6% you would be looking at 1500/month in interest on a smaller balance(300K). 

One strategy might be to add 200/month to your payment.  This would decrease you balloon balance to 280K.  This would keep you initial interest payment the same on refinancing the balloon if rates increase to 6%.  Your refinance payment will actually be lower due to the lower balance.  At 6% and 300K(no extra payment) your payment on a refinance is basically the same, but you are paying more interest.

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