OK. I'm new here, and I'm ready to drop some money. I can't for the life of me figure out why this property with a 13.46% CAP RATE (which is impressive for California) has been on the market for 174+ days but from my POV it brings in some $$$$.
I noticed it says "Please do not disturb tenants, they do not know it is for sale" - so I imagine the property hasn't been inspected.
Why's this on the market still? Any ideas?
My analysis has come to:
CAP RATE: 13.46%
Purchase Price: $270,000
Down Payment: $67,500 (25%)
Monthly Mortgage: $1247.63
Monthly Gross Rent Income: $3000.00
Monthly Net Income (excludes mortgage): $2916.67
Cash Flow after mortgage: $1669.04/month
Cash on Cash Return: 29.67%
Numbers look great, so what's the catch?
good point. maybe because they want an offer before you have the ability to view?
If a 13.46 Cap rate is impressive for your area, then you need to do some additional research about the area in this property is in. I'm sure you will find obvious reasons for an abnormal rate.
Looking at the the numbers you have provided, it seems you are missing some big items. For one, COC is NOT simply rental income minus mortgage pmt. maintnence, vacancy, and cap ex definitely need to be factored in. If you use a standard 30% for your maintenance, vacancy , property management and Cap ex ($900), then subtract insurance and taxes to arrive at a net operating income. From their subtract your mortgage payment and what you have left is cash on cash.
Don't forget property taxes, insurance, maintenance, management, etc., in your numbers.
It looks like it's fallen out of escrow a few times. Maybe it has some major maintenance issues? Might be worth calling the agent and finding out exactly why it keeps falling out of escrow. If there's major deferred maintenance, definitely make sure to take that into account in your numbers. The deal needs to work for YOU not the seller.
I have visited that sub-division of Palm Springs.
Do the following:
(1) Check out the comparable sales for the neighborhood, particularly that subdivision. Does anything support this valuation?
(2) Look at it on Google Maps. Three small streets north is Tramview and that is the end of the sub-division, and for that matter, Palm Springs. Then there is a big, wide open space. That is what they call desert. Lots of sand and no water.
First, the 13.46% cap rate is totally, completely, utterly bogus. Its a lie. Its a fourplex that rents for $750/unit/month. That's $36,000 per year in gross scheduled rents. They're asking $270,000. A cap rate of 13.46% implies net operating income of $36,342. On rent of $36,000? Not only does that imply there are no expenses at all, but an extra $342 a year falls out of the sky. So, that cap rate number is complete fiction.
Cap rates provided by sellers and their agents are almost always fiction. Ignore them.
A more realistic estimate of cap rate is to apply the 50% rule to estimate NOI at $18,000 a year. Divided by the $270K asking price gives a 6.7% cap rate.
If it has been in and out of escrow there is some non-obvious issue. Asking for a contract prior to inspections isn't too unusual. But the fact it keeps falling out indicates there is probably some issue that crops up when the buyers start looking. So, this is an even worse deal that it initially appears.
Jon Holdman, Flying Phoenix LLC
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