Is it too good to be true?

Question

I have been looking at multifamily properties in my area and when I run the numbers with the current rents, buying for a price 10-15% below what it's listed for, and being very conservative (assuming the worst) with my expense calculations, the CoC returns are still upwards of 15%. I'm not sure if my area is just a great area or if my calculations are way off but it seems too good to be true and I was wondering if anyone could provide some tips on what to do in this situation!

Bill B. · Answer

Fill out your profile, including location, you’ll get more localized help.

Todd Dexheimer · Answer

What area are you in? 6.6% cash on cash is nothing to write home about.

Without posting the details of the property analysis, it is impossible for us to offer much help. Post all of the expense assumptions, who pays for what utilities and we can help more.

Evan Polaski · Answer

@William Hucks, your revised numbers seem more in line for my area (Cincinnati, stable neighborhoods).

But in general, your dings to cash flow are:repairs and maintenance material and laborManagement FeesInsuranceReal Estate TaxesInterest ExpenseLoan Amortization

And getting the price down will help, but if you are primarily focused on CoC, your goal should be less money down.  And as @Erik Whiting mentioned, in that price point, you are probably going to be competing against 30 other people sitting on cash just looking to get into the real estate, and are willing to overpay.

William Hucks · Answer

Well I just realized I wasn't accounting for property management costs! With that as a factor I am getting more realistic returns closer to 10-11%. I don't know for sure that the owner will accept 10-15% below market but I am trying to figure out what number makes it worth it for me! One of the properties is listed for 200k, rents for 1870 a month and I've calculated an average of 724 in expenses per month (going overboard with CapEx and it has a 2 year old roof). That means buying the property at the listing price of 200k at a 20% down payment will give me a 6.6% CoC return. If I can get it for less or put less down then that only goes up. Thank you for your response and I will run a more detailed NOI and Cap Rate calculation!

Erik W. · Answer

@William Hucks, hi and welcome to BP.

Not enough information to tell.  CoC is not detailed enough.  Example, let's say the property brings in $500,000 year but costs $499,900 for all expenses and debt service.  Additionally, you were able to buy it with only $50 out of your pocket and somehow financed the rest.  The $100  profit on your $50 investment would be a 100% CoC.  This example is kind of ridiculous, but you see why CoC percentage isn't detailed enough to make a thorough analysis.

I suggest running a full NOI & Cap Rate calculation for starters and comparing it to other deals in your area.

Also, how sure are you the Sellers will accept a price 10-15% below asking?  In many markets today, MF are priced high and there are bidding wars for good properties.  If that is the case, your offer may be flat out rejected without a counter.

More detailed on these two areas, please.  You already used the first half of the old saying, "If it looks too good to be true...."  We'll try to help you determine if the remainder of the saying is true or false, but we need a lot more information.