Understanding debt financing - multifamily
If I buy a multifamily property at 600k with 20% down and finance the rest at say 6%..after running numbers my cap rate comes out to about 8% and cash on cash return at about 43% (its 12 units at approx 575 monthly rent income, and the report shows 30k a year in expenses and 80k in gross. My concern though is using my net profit to pay the mortgage obviously and end up with about only 12k hard cash in my hand. But am I missing the point that I am building equity in the property with financing (paying payments) or making improvements to the property to raise rent and to be able to build wealth like that?
Thank you in advance for the clarification.
- Los Angeles, CA
- Votes |
Without the full calculator I can't say for sure... But here's a few thoughts:
- 120k downpayment (20% of 600k) with an annual hard cash return of $12k, works out to be a 10% cash on cash return. This doesn't account for principal paydown, tax benefits and all that extra crap.
- Are you worried that this return isn't good enough? What are your goals and do you have another option for your $120k that will yield a higher return?
- Just curious, does your calculator take into account property management, vacancy (at least 1 unit will probably always be vacant), and healthy maintenance costs?
- If you want I can send you a calculator that takes into account the principle paydown and rent increases year on year.
Yes I am just worried about the percentage and if it is wise to put down that down payment and pay a mortgage and still make a little but would that tie me up to make further investments? I wouldn't have another hefty down payment like that for another little bit. Unless lenders would let me get another using equity from this one? But I suppose that is how it works? The calculations were based on all expenses such as vacancy, management and maintenance costs. They have it listed it at 600k with the gross at 81k and NOI 51k, but I did some of my own calcs.
I definitely can use your suggested calculator and share the results so you can give me a better opinion.
Thank you for the help!
- San Diego, CA
- Votes |
Hey @Antonio Pican - on a multifamily property like this you're going to want to know your exit strategy and business plan going into the transaction. One of the attractive points of commercial real estate is the ability to force appreciation through rental increases and operational efficiences. With a common value-add investment, you're first going to buy the deal right, and then utilize your business plan to raise the NOI (increase the property's value), and ideally re-finance or sell the asset all together.
With that being said, compare the cap rate your calculating to the cap rates associated in your submarket for this particular asset class. This will give you a good idea of fair market value, and what the opportunity looks like should you be able to operate the deal succefully. All the best moving forward!
@David Acosta that makes perfect sense. So the goal is not just to sit back and pay the mortgage and wait X amount of years to build equity and keep paying interest even though your making only 12k hard a year. But to do what you said and make the NOI go up. Because if I put 120k down (entire capital I have) I need to be able to get that entire money back quickly to make another investment correct?
@Joel O'Leary thank you for the information. Can you please send me the calculator?