Should I purchase this apartment in Bay Area preium location

Question

Currently, I get one off market listing in preium location in Bay Area like Sunnyvale 94087. Here are financial statistics:

Annual Scheduled Income: $240,000

NOI: $180,000

Sale Price: $3,000,000

Cap Rate: 6%

Value add potential:

5 bedrooms can be remodeled to increase rent by $5000 monthly and total rehab budget is about $450,000.

Some background about myself:

I am W2 worker in Bay Area and like real estate. To save time and reduce management cost, currently I only invest local apartments at preium location to accumulate positive cash flow. I am satisfied when rent increases and tenant profile improves after rehab.

This purchase is my last bullet. If I pull the trigger, I am worry about the impact of possible stock market burst. Meanwhile, this deal is the best deal I can find and I don't want to miss it. As you know, 6% cap in preium location is a good cap rate in Bay Area and value add potential is the safe margin.

Question: Do you recommend to purchase it under current stock market? Any suggestion is welcome.

G. Brian Davis · Answer

Hey @Zhenyang Jin, stress test the numbers. What happens if rents take longer to increase, rehab costs run 20% over budget, or you have higher vacancies for a year? If the deal still produces acceptable returns under those scenarios, I'd be much more comfortable.

Wilson Lau · Answer

6% cap does seem like a great deal for Sunnyvale. I have been seeing 3-4% in that neighborhood. Does the building have lots of deferred maintenance? What is the unit mix look like?

Zhenyang Jin · Answer

Thank you for the useful suggestion. Yes, rehab costs is easy over budget and mortgage rate is also hard to estimate.