Should I purchase this apartment in Bay Area preium location

Question

Currently, I get one off-market apartment listing in preium location in Bay Area like Sunnyvale 94087. Here are financial statistics:

Annual Scheduled Income: $240,000

NOI: $180,000

Sale Price: $3,000,000

Cap Rate: 6%

Value add potential:

5 bedrooms can be remodeled to increase rent by $5000 monthly and total rehab budget is about $450,000.

Some background about myself:

I am W2 worker in Bay Area and like real estate. To save time and reduce management cost, currently I only invest local apartments at preium location to accumulate positive cash flow. I am satisfied when rent increases and tenant profile improves after rehab.

This purchase is my last bullet. If I pull the trigger, I am worry about the impact of possible stock market burst. Meanwhile, this deal is the best deal I can find and I don't want to miss it. As you know, 6% cap in preium location is a good cap rate in Bay Area and value add potential is the safe margin.

Question: Do you recommend to purchase it under current stock market? Any suggestion is welcome.

Greg Scott · Answer

I never care what the stock market is doing because I don't have much money in the stock market.  If I find a good real estate deal, I would buy it.

There is not enough information here to evaluate the deal.  On the surface, it sounds OK.  At a 6% Cap Rate, it may be hard to cashflow unless you have low leverage.

The devil is really in the details.  Is the NOI really $180,000?  Did you deep-dive that?  (The expense ratio is a bit low compared to what I am used to seeing.)  Have you forecast property taxes correctly?  Do you have management in place that can operate this property?  Are you familiar with how to manage tenants in a very tenant-friendly state and a very tenant-friendly city?

There are a thousand ways the deal could go wrong if you haven't dug into the details.

G. Brian Davis · Answer

The part that stands out to me is that you said this is your last bullet. That would make me slow down more than the cap rate or what the stock market might do. I'd want to make sure I still had plenty of reserves after closing and after the renovation. Good deals come along all the time. You don't want one deal to leave you with no flexibility.

Zhenyang Jin · Answer

@Greg Scott

Thanks for the insight.

The number is close to the real number and I just round-up them. I ran apartment in the same location and familiar with the market.

Yes, you're right. Money velocity is not high. I put about 50% downpay to get the DSCR loan. After rehab, I can get back more than half of the downpay and with some cash flow. A bit conservative here.

Regards, Zhenyang Jin