Do you think this is a good deal?

Question

Hi Everyone!
Looking for opinions and discussion.

Here is the description:
22 Units composed of 8 - 2/1.5 and 14 - 2/1
100% occupied
Monthly Income = 11k
Monthly expenses = 4k
Net Monthly Income = 7k
Annual Net Income = $84,000

$925,000 price makes cost per unit $42,000
Located in Central Valley of California

As I said before, looking for other investor opinions and discussion on why you would or would not consider a deal like this.

Thanks!

:D

Nathan Emmert · Answer

Nope.  50% is the long term average... accounts for things like having to paint the exterior every now and again, the occasional septic issue, replacing a room every few decades... those sorts of things are big expenses and don't show up in year to year reports.  You may be able to count on fairly consistent numbers similar to what was given, but you have to be prepared to have 0 or negative cash flow every now and again when a big ticket item happens like the tenant who not only needs to be evicted but destroys the apartment before he goes.

Jacob Morgner · Answer

Thank You Jon and Nathan for your input.

If you had a report showing the actual expenses holding true at 4k per month for the past 2 years would it change your thoughts on cashflow/cash on cash ?

Nathan Emmert · Answer

You're at a 9% CAP Rate if those monthly expenses hold true.  If you trend towards the average of 50% expenses the CAP Rate drops to 7%.  You're essentially paying retail value.

Assuming 35% down, you're going to mortgage $600k at about 6.5% for $3,800 a month leaving a cash flow of $1,700 a month, $20,400 for the year.

$20,400 / $325,000 = 6.3% Cash on Cash.  If you do hit the mark at only $4k a month in expenses, you'd be closer to 12% cash on cash.  I wouldn't bet on that.

I mean, it beats a savings account or bond... but there's better money to be made.  Try to find 12 - 15% cash on cash assuming 50% expenses, that would be a stronger investment.

Jon Holdman · Answer

Average rent is $500 per unit.  You're paying $42,000 per unit.  No, I would not consider that a good deal.  It certainly won't produce any cash flow at that price.  If cash flow is your goal, this won't work.  If there is some other goal perhaps there's a way to make money on this.