Too good to be true or gold mine?

10 Replies

I have been doing a lot of research on what are key numbers to value an income property and determine whether its worthwhile. I have posted recently about this property I am in the process of purchasing and compared to the numbers I see floating around on other posts, I feel this property is either too good to be true on returns, I am running the numbers wrong, or this property is a gold mine.

Purchase Price $145,000

Down Payment (20%) $29,000

Mortgage (15yr/4.75%) $10,824

Rents (6 units)

Unit 1 - 4 = $675/mo

Unit 5 - $650/mo

Unit 6 - $600/mo

Total Monthly Income = $3950

Total Yearly Income = $47,400

Expenses (Annually)

Taxes - $2570

Insurance - $1200

Heat - $3200

Electricity - $2600

Trash - $600

Water/Sewer - $1200

Propane - $300

Snow - $800

Lawn - $800

Vacancy - $3000

Repairs - $3000

Management - Zero as I will be managing

Mortgage - $10,824

Total Expenses = $30,094

Income $47,400 - Expenses $30,094 = $17,306

CAP RATE after all expenses/debt services - 17,306 ÷ 145,000 = 11.9%

CoC Return - 17,306 ÷ 29,000 = 59.6%

Some may argue vacancies and repairs are low, but in my case, based on what I know and see with this property, I am confident in these numbers. The building is in great shape. Roof is 8 years old, all electrical has been updated, pellet boiler is 8 years old, vinyl siding, units are all in good shape. There is also a low vacancy record on this property as well as a waiting list (no section 8 in property, but its section 8 approved). Even considering being extra conservative and increasing vacancy and repair to $5000/ea, I feel this is still a strong return. What do you guys think? Am I under estimating or did I find a good deal?

You can buy a 6 unit mf property for 145k? Dang I'm living in the wrong coast of the us.

A couple thing stick out to me. 1. No closing costs? 2. are you sure you can get 4.75% and 20% down on a commercial property? this is 6 units. Still looks like a great deal just based on the numbers.

There will be closing costs which I expect to be around $2500. My previous property was a 3 unit and closing costs were $2000, purchased under a commercial loan under the same terms. I know 1-4 units and 5+ units are different animals but this shouldn't change my expected terms as that was what they were on my last property which was commercial lending. I put in the loan application yesterday and waiting to hear back.

@Andrew Michaud By the numbers this does look like a very good deal to me. A few minor notes. 

With respect to the cap rate calculation. Cap rates are determined based on the purchase price and Net Operating Income(NOI). The NOI calculation is income - operating expenses. Operating expenses do not include financing costs so you would not include your debt servicing. However, you would have to allocate a management fee of at least 5%(Others may show 7% or 10% for this figure) and a capital expense budget. Make sure repairs, management, and vacancy reflect the class of property you are purchasing. Based on a cap rate you would clearly be much better then what you are showing.

These deals are out there and it depends on your market. I just bought a 3 unit for $56k that cashflows $1200 a month for me. Needless to say based on a cap rate I bought a 25cap property... stupid.. but I am very happy with it. 

Originally posted by @Dillon Leider :
A couple thing stick out to me.

1. No closing costs? 2. are you sure you can get 4.75% and 20% down on a commercial property? this is 6 units.

Still looks like a great deal just based on the numbers.

Should have no issue getting a loan on these terms given you are expecting a balloon payment at 5 or 7 years. 

I am closing an 8 unit on Wednesday with 10% down(bank lending 80% and seller carrying 10%), and my commercial loan terms are 4.5% on a 20yr amortization, 5 year balloon, with $1200 bank closing costs. Appraisal is what killed me which ran $2k on this one.... super frustrated on the appraisal cost but the bank wouldnt give me any other options to close within my timeframe. 

@Joel Florek that is a great return on 3 units! I have a good feeling about this one. Thank you for the response!

@Andrew Michaud   @Joel Florek

Although you will be self managing you should ALWAYS count Property Management in your numbers because eventually you will scale and have multiple properties. Also it looks like you may not have counted on Capex as well......they say (roughly) $183/mo for the building. Other than that the numbers look absolutely fantastic......How in the heck did you score a 6 plex for $145,000 that's in decent shape?

Congratulations man

If this is not in a D class area and it truly is well maintained without much deferred maintenance or old mechanicals, it is a home run deal and a no-brainer. As mentioned above, debt service should not be included in your expenses to determine NOI.

Where is this property?  Does the seller have any other properties - buy them all if you can get that kind of pricing!

@Andrew Michaud It seems that you are evaluating the property correctly. What is the demographic of renter in the area?

If those numbers pan out, I would very seriously look at investing in Caribou, ME myself!

That's a stellar deal, @Andrew Michaud .

It starts out looking good, because $3950/mo rent on a $145k property is 2.72% of purchase in monthly rent!

Even if I burden with 10% management, your $23,390 NOI per year is a 16% cap rate (assuming no financing), and then w/ your financing, you're net cash flow of $1047/mo ($174 per door) is a 40% cash on cash on your $29k down payment and closing costs of $2500.

Great find.....if you're comfortable with the repair/vacancy assumptions and risk/reward of this property appreciating or holding flat, or depreciating.

Good luck

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