$50 K Per Unit Rent is $550 per unit....Pursue or Pass?

4 Replies

Greetings All, 

There is multifamily complex for sale locally. The seller has come down to 50k per unit (down from 56k) per unit. These units rent for $550 per month. It is a growing area and rents are increasing with time. It is a good complex with 16 units (4-plexes).  

With out all going through tax rates, debt service, etc, Would anyone pay $50 k per unit with rents of $550 per unit? The buildings are in good shape and have metal roofs. There also onsite tenant manager who has taken care of property in full for years. (everything from lawns to showing and signing leases.

Remember just based on this information, I would be pleased to see the groups thoughts. 

Thanks and Good Luck

Jordan 

@Jordan Vires  

If I understand what you propose:

16 units

Price 50K per = $800,000

Current Rent Potential = 16 X 550 = $8,800 per month or $105, 600 per year

Just a quick 50% rule would have you at $51,120 NOI per year

6.35% Cap Rate (NOI/Purchase price)

Down Payment = $200,000

Loan = $600K

Loan payment based on 6% for 30 year amoritization = $3597/MO or $43164/YR

Yearly CF = $7956

Cash on Cash return = 3.98% (Yearly CF/Down Payment)

Just the back of the envelope analysis seems to indicate that the price of the property isn't supported by the rental income that is generated from the property.  Greater than 5 units is considered commercial property.  All commercial property is valued based on its CURRENT Net Operating Income and the going Cap Rate of the particular market the property is located in.

I get a cap rate of 6.6% using a 50% expenses rate.  If you are paying cash your return is the cap rate + appreciation rate.

If you are financing it I like my cost of money to be 3 percentage points less than my return.  Unless I can get 3.6% money I think it is a pass.

Good Luck.

Bill

@Jordan Vires 

The little mentorship I've had, tells me that you can't analyze a deal without analyzing the financing you'll use in said deal as it drastically effects the outcome.  That being said, using your values (and assuming some normal financing) I'd agree the property is still overpriced.

@Bill Jacobsen    If you don't mind my asking, what exactly do you mean by "I like my cost of money to be 3 percentage points less than my return"?

Are you saying that you'd want >9% cash on cash in @Bradley Benski 's example above?

AND, what makes you follow this metric?

Thanks for indulging my curiosity!

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