Need validation of my calculation on this apartment units deal

1 Reply

I came across a apartment complex in Dallas area and did my learning exercise of cap rate. 

Property details as mentioned:

Price: 795K
Units: 12
Occupany ~95%
AGI: 172K
AGE (expenses):  95K
NOI: 77K
HOA: 66K

My Calculations:
Tax rate: 2.82% (total)
HomeInsurance: 0.35%

I just looked up conventional loan at 25% down, added up standard costs, and monthly mortage with principal comes to 10K. Further, estimated 35K in annual expenses (have a suspicion that this is too high), calculations become:

AGI: 172K
Mortgage: 12* (10K-3K principal) = 12*7K = 84K
Annual expenses: 35K
NOI: 53K

So, cap rate would be around 53/795 = 6.95

1. I will manage the property myself, so no management fees
2. Not sure how assessments impact the costs, so any pointers would be great
3. Any large expenses are not planned in these calculations

From all this, it doesn't sound like a great deal to me. 

Can you please review this and let me know if my calculations have some obvious holes in them that I am not looking at - like unknown expenses, costs or income risks? I can point to realtor link but wasn't sure if it is allowed on this site.


Ashwani K.

A couple comments:

1) NOI is based on the property only and should not include your mortgage payments. It should just be property revenue - property expenses.

2) In terms of calculating your NOI:

a) Management Fee: You should still use a management fee (5-10% properties under 50 units, 3-4% over 100 units) as investors and banks will include a property management fee when underwriting the transaction.  

b) Capital Reserves: You should also include a capital reserve, $300/unit is typical for a 1970's-1980's property depending on when it was last renovated.

c) Real Estate Taxes: Check the current assessment at the tax appraisal website and make sure to use at least 75% of your purchase price when calculating future real estate taxes

After making these adjustments, you can figure out the correct NOI and thus the correct cap rate.