8 fam N of Boston, bow wow or is my math wrong? 1st X comm

6 Replies

Dear BP community,

I saw an 8 family today that I liked, but my math tells me it's not for me. The asking price is $1.1M.  On the debt service, I was going to leverage a home equity line for the down payment with a 2.5% interest rate, but for analysis purposes I assumed debt service on the entire asking price at 4%. I can't get it to cash flow, am I missing anything?  I feel pretty strongly that the expenses are reasonably solid.  I've based my rental income on existing cash flow ... the seller suggest rents can be raised but figuring on actuals made more sense for me of course! 

This is my first time doing analysis on a commercial property so thank you all in advance for your input, it's greatly appreciated.

-Jeff

Revenuemonthlyyearly
Rental Income$9,570$114,840
vac rate @ 5%-$525-$6,300
Net rental income$9,045$108,540
Gross income$108,540
Expenses
Property Taxes$1,010$12,120
Insurance$508$6,096
Prop mgmnt @ 10%$905$10,854
water/sewer$168$2,016
gas$178$2,136
electric$140$1,680
snow removal$175$2,100
trash removal$10$120
landscaping$200$2,400
M&R$464$5,568
Total Exp$45,090
NOI$63,450
Debt Service *$5,252$63,024
Cash flow?$426
return on investmentn/a
capitalization rate5.77%
cash on cash returnn/a
* assume $1.1M @ 4% for 30 years

108,540 / 2 = 54,270 NOI

54,270 / 1,100,000 = 5 cap

If you are going to buy at that cap rate you might as well buy a single triple net property at a 6 cap to 7 cap with 2% annual rent increases, no landlord responsibility, and a 15 year lease.

This way the tenant pays all the expenses and you just cash the checks.

MULTIFAMILY even with a property manager is work. When you have to work an investment then it has to throw off extra yield to justify the time and aggravation.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

The formatting on the expenses is so bad it is hurting my head to try to read it.

I'll guess that you aren't crazy off on any of that though.

If it isn't cash flowing with those numbers then it REALLY won't be a good investment if you are planning on financing the down payment as well.

First off this is a commercial loan, you aren't getting 30 years.  More likely something like 10 years or less with a 20-25 year amortization, or less at a higher rate than that.  Not sure what the going rate is but I'll guess you are looking at 5-5.5% or more.

Also how big is your equity line?  You are going to need like $330K for that if you are going use that for the down payment.  Though I guess if you really have $330K available at 2.5% your blended rate might be close to 4% (still not with a 30 year payment though).

Anyway really what Joel said... 

Medium rre logo web rgb w motoShaun Reilly MBA, Reilly Real Estate, LLC | [email protected] | 1‑800‑774‑0737 | http://www.MassHomeSale.com | MA Agent # 9517670 | Podcast Guest on Show #43

You have 39% as all in annual expenses.

Will be more like 50 to 60% based on age of the building and any landlord paid utilities.

Even at 114,480 number it makes no sense.

Annual rent growth average for multifamily is about 3% which keeps pace about even with inflation. Some areas have stronger rent growth of 4 to 6% but I believe they are on a torrid pace and will slow down so that number is not sustainable long term for conservative projections.

Again you need to get this at about a 7 cap minimum at least and have solid rent growth.  

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

Thanks Shaun and Joel for the replies.

@Jeffery Hood  

This would have been a good one to use the 1% rule on.  It's not close, so skip it.

I'd venture that place would be a good investment at about $650k.