DSCR vs. Cashflow vs. cap rate Who wins?

Question

Hey BP,

I am re-focusing my investing from "pigs" to multifamily. I have a goal to analyze 50 deals just to get used to the numbers and where they go. My dilemma is this: when looking at deals I come up with great DSCR I think (higher than 1.2) cash flow after all expenses is greater than $100 per door,  however if I take the net operating income and divide it by the cap rate for my area (8.5%) it comes out substantially less than the asking price. Am I totally off to compare all 3?

Loan Terms

Purchase Price

$155,000

Amortization (Years)

30

Loan Amount

$124,000

Annual Debt Service

$7,104

Loan to Value (LTV)

80.0%

Monthly Loan payment

$592

Interest Rate

4.00%

Offer Price

$112,027.06

Income

Profit and Loss

Gross   Annual Rental Income (use current Rent Roll or 1040 Schedule "E")

$17,400

Other Income

$3,060

Total Annual   Rents

$20,460

100%

Less   Vacancy (Minimum Actual % or 5% [Office 10%] of Total Rents )

$2,046

Effective   Annual Gross Income (E.G.I.)

$18,414

Annual   Operating Expenses

Management Fees (minimum   actual % or 5% of EGI)

$921

Utilities / Water Sewer/Telephone

$0

Repairs and Maintenance   (.50 sq.ft./yr)

$978

Salaries / Legal / Admin   / Advertising

$300

Snow / Trash

$1,736

R.E. Taxes

$2,957

Insurance .25/sq/ft. avg

$1,500

Other

$0

Less Reserves (Minimum $250 /apt,   $0.15 /sf for Retail and Industrial, & $.20 /sf for Office )

$500

Total   Operating Expenses

$8,892

43.5%

NOI

$9,522

Cash Flow

$9,522

46.5%

Less Annual Debt Service

$7,104

Cash Flow   After Debt Service

$2,418

Debt   Service Coverage Ratio (DSCR)

1.34x

Cash   Flow Per Unit Per Month

$100.77

Footnotes:Minimums $100 Per mo./unitDSCR 1.2 or

Adam Fansler · Answer

(Sorry I cleaned it up)

Loan TermsPurchase Price$155,000

Amortization (Years)30 Loan Amount$124,000

Annual Debt Service$7,104 Loan to Value (LTV)80.0%

Monthly Loan payment$592 Interest Rate4.00%

Offer Price$112,027.06

IncomeProfit and LossGross Annual Rental Income (use current Rent Roll or 1040 Schedule "E")$17,400

Other Income$3,060

Total Annual Rents$20,460

Less Vacancy (Minimum Actual % or 5% [Office 10%] of Total Rents )$2,046

Effective Annual Gross Income (E.G.I.)$18,414

Annual Operating Expenses

Management Fees (minimum actual % or 5% of EGI)$921

Utilities / Water Sewer/Telephone$0

Repairs and Maintenance (.50 sq.ft./yr)$978

Salaries / Legal / Admin / Advertising$300

Snow / Trash$1,736

R.E. Taxes$2,957

Insurance .25/sq/ft. avg$1,500 Other$0

Less Reserves (Minimum $250 /apt, $0.15 /sf for Retail and Industrial, & $.20 /sf for Office )$500

Total Operating Expenses$8,892

NOI$9,522

Cash Flow$9,522

Less Annual Debt Service$7,104

Cash Flow After Debt Service$2,418

Debt Service Coverage Ratio (DSCR)1.34x

Cash Flow Per Unit Per Month$100.77

Footnotes:Minimums $100 Per mo./unitDSCR 1.2 or Higher

Adam Fansler · Answer

Thanks Bob,

I guess I was looking at the Apartment-Garden/Suburban section which is close to the cap rate the wife is seeing in the area for larger apartments.

Justin Fernandez · Answer

Well, it only makes sense if you're taking a loan to the property and then leveraging that property to get another.

Using a HELOC for the Down payment of another property.

It just doesn't sound worth pursuing, unless you plan on living there?

I understand for some that having 0 living expense frees up a lot of money to pay off other things! (I am that some :) )

Adam Fansler · Answer

Yeah that's what I'm struggling with (equity vs cashflow). Its actual numbers, rents are slightly low $20 per month max.

Account Closed · Answer

At best all that realty rates is reporting is the movement of AVERAGE cap rates throughout the country.

http://www.realtyrates.com/commentaryg.html

Unless you have actual comps (specific property sales) that show the calculation of the NOI then you don't really have a reliable number.  That is like saying home sales are up 5% across the country vs knowing your NBHD sales (specific properties) are only selling for about 1% more,

Also look at the properties that they are reporting

http://www.realtyrates.com/is-property-types.html

I don't see 1-4 units.

Justin Fernandez · Answer

Just looking at your footnotes, it sounds like you're barely scratching there.  Are you ok to take on that kind of risk for a Turn Key? And if that's pro forma too, then are you sure you want to pursue it?

Usually, it's better to value add so you can squeeze more out of it, but it looks like you'll have some equity I guess.

Adam Fansler · Answer

these are turnkey rented units

Adam Fansler · Answer

Cap rates are coming for realtyrates  investor survey 2nd quarter 2015 small multi 1-4 unit.

My wife is a commercial real estate appraiser and has access.

Should I  focus more on comps and cashflow for 1-4 unit? $100 per month per door?

Justin Fernandez · Answer

Cashflow is king for small multi's.

DSCR = Is for loan underwriters

Cap Rate can be used for small, but is generally for Large Multi's. (I could be corrected on this)

Are you buying turnkey or fixer upper?

Account Closed · Answer

Where in the Hell are you getting cap rate comps for small multi's?  By definition if you have valid comps AND correct NOI then the market value is NOI/.085.  Doesn't matter what an asking price is.

So either you don't have real cap rate comps or your calculation of NOI is bad.

Loan Terms
Purchase Price	$155,000	Amortization (Years)	30
Loan Amount	$124,000	Annual Debt Service	$7,104
Loan to Value (LTV)	80.0%	Monthly Loan payment	$592
Interest Rate	4.00%	Offer Price	$112,027.06
Income		Profit and Loss
	Gross Annual Rental Income (use current Rent Roll or 1040 Schedule "E")	$17,400
	Other Income				$3,060
Total Annual Rents				$20,460	100%
	Less Vacancy (Minimum Actual % or 5% [Office 10%] of Total Rents )	$2,046
Effective Annual Gross Income (E.G.I.)			$18,414
Annual Operating Expenses
	Management Fees (minimum actual % or 5% of EGI)			$921
	Utilities / Water Sewer/Telephone				$0
	Repairs and Maintenance (.50 sq.ft./yr)			$978
	Salaries / Legal / Admin / Advertising			$300
	Snow / Trash				$1,736
	R.E. Taxes				$2,957
	Insurance .25/sq/ft. avg				$1,500
	Other				$0
	Less Reserves (Minimum $250 /apt, $0.15 /sf for Retail and Industrial, & $.20 /sf for Office )			$500
Total Operating Expenses				$8,892	43.5%
NOI				$9,522
Cash Flow				$9,522	46.5%
	Less Annual Debt Service				$7,104
Cash Flow After Debt Service				$2,418

Debt Service Coverage Ratio (DSCR)				1.34x
Cash Flow Per Unit Per Month				$100.77
Footnotes:Minimums $100 Per mo./unitDSCR 1.2 or

DSCR vs. Cashflow vs. cap rate Who wins?

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