Making money after debt services???

Question

I’m interested to know how long term hold strategies work on multifamily. I’ve never done a large multifamily deal but when I do the math not sure how anyone can make any Money on a property doing a 6% CAP or less. I’m obviously missing something so if anyone can set me straight or recommend some reading I’d really benefit.

For instance:

10 unit Asking price: 1,000,000

NOI: 60k

Down payment: 250k

Reserves:50k

5.8% interest Loan:750k

P&I: 52.8k

Adam Philpot · Answer

@Alex Olson thanks that is helpful

Evan Polaski · Answer

@Adam Philpot as has been mentioned, the debt is very important to get right for a stabilized play and can be found for lower rates.  For a value-add play it is still important, but typically not going to be breaking the budget quite as much, especially if you have the ability to raise rents reasonably significantly.

Also, out of curiosity, does that NOI have built in on going reserves?

Percy N. · Answer

@Adam Philpot, as others said, find a better lender and ways to increase NOI.

If it needs work, get an interest-only bridge loan for 2yrs and then refinance (make sure you can) to a longer-term debt.

Greg Dickerson · Answer

You can get much better financing than what you’re using in your example. You can also get interest-only to boost the cash flow during the value add period.

Michael Le · Answer

Sheesh, 20 year term at 5.8% interest? No wonder you're not cash flowing. lol

I'm not sure your financial situation and what lender you're working with but Fannie/Freddie agency loans are around 3.5% right now on 30-year amortization.

Adam Philpot · Answer

@Michael Le thanks. So if I was doing amortization of 20 years on a 20 year term you think the interest on the loan would be a lower percentage?

Alex Olson · Answer

@Adam Philpot A person buys on a less than 6% cap rate for a few reasons. 1) they have a 1031 exchange and are putting down 30-50% of the purchase price 2) are doing a value add to push it over 6% cap rate 3) are buying because appreciation is faster than normal (Santa Monica in CA). Hope this helps.

Michael Le · Answer

Is it going to be 6% cap forever? Are you not doing any value add to the property that would push that up? If it's a stabilized yield play then you should be getting much better interest rates than you're showing. That 5.8% rate would be a bridge rate (a bad one even for this current market), which would imply you should be able to make money by pushing rents, etc.