Help with 5-plex analysis

6 Replies

I'm looking at a 5 unit, which would be my first MF, and wondering if you would share any thoughts on this.  Have bought, fixed, and held single families with good success, but currently without any investment properties.

gross rent ~ 49k

NOI is about 19.4k, which includes 10% mgmt fee, 10% vacancy and 10% maintenance/capex.

Condition of units very good, built in 1980.  I would plan to finance but haven't priced any commercial loans.  An option would be to pay cash and then finance after.

Assuming PP of 320k, with 80% loan at 5%, cash flow is negative.  Finance 200k, and cash on cash looking low.

Would really appreciate any thoughts and advice to help analyze if this is 'in the zone' or now.


I would add, asking price is 365k, so my 320k pp assumption above isn't a certainty. thanks

That property is being offered at a 5 CAP, and your $320k offer is a little over 6. Way too low for my tastes.

Offer substantially less or walk away, something on the order of $250k or less.

Wade - thanks.  You've confirmed what my feeling is - still letting emotion get in the way ... a little bit.


@Jeffery Cooper I think your NOI is a bit low, it should be more than that. Maybe the owner is paying additional expenses they do not need to. But I would agree this property is one you should pass on. You're looking at a 6 cap, which you can't make any money on if you're looking for cash flow. If you are looking for value add, then see how appreciation can be forced here if and only if properties in your area are trading at a 6 cap. If they are trading at an 8 or 9 cap this is way overpriced as it is and you cannot make money through cash flow or appreciation. If you put a mortgage on this thing, you lose money

The only way the cap rate works at the PP you're considering is if there is substantial appreciation in rents in the area. At the numbers you presented, even at a 7 cap rate the property isn't worth 360k until year 7 (if you assume rents grow at 3% a year and expenses grow at 2% a year) and you have negative cash flow for the first 2 years.

Since it's a 1980 property, I'm assuming it's not on the bleeding edge of the path of progress and I'm assuming it's not a A class property (a 5 cap is usually reserved for high demand areas and A class properties).

Unless you're very certain the rental rate growth is substantial, I wouldn't buy this property for anywhere near what they are asking for it.

Thank you Devan and Michael.

Your feedback and insights are greatly appreciated.

Others I'm sure are used to it, but it still surprises me how selling brokers act so amazed/offended with even a hint that their listing could possibly be overpriced!


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