NEED HELP TO ANALYSIS THIS DEAL.

4 Replies

HI! guys. can you guys let me know if this a good deal or not. I'm in the learning process how to read all this number so I'm trying not to make the wrong decision here. This a 16 unit apartment . Any input will help.

THANKS 

Graphs

Income Year 1 Year 2 Year 3 Year 5 Year 10 Year 20 Year 30
Gross Rent $96,312 $99,201 $102,177 $108,400 $125,665 $168,884 $226,966
Vacancy Loss -$4,816 -$4,960 -$5,109 -$5,420 -$6,283 -$8,444 -$11,348
Laundry $0 $0 $0 $0 $0 $0 $0
Operating Income $91,496 $94,241 $97,069 $102,980 $119,382 $160,439 $215,617
Expenses Year 1 Year 2 Year 3 Year 5 Year 10 Year 20 Year 30
Insurance -$3,877 -$3,955 -$4,034 -$4,197 -$4,633 -$5,648 -$6,885
Management Fees -$7,320 -$7,539 -$7,765 -$8,238 -$9,551 -$12,835 -$17,249
Taxes -$4,771 -$4,866 -$4,964 -$5,164 -$5,702 -$6,950 -$8,473
Misc. -$6,408 -$6,536 -$6,667 -$6,936 -$7,658 -$9,335 -$11,380
Operating Expenses -$22,376 -$22,896 -$23,430 -$24,535 -$27,544 -$34,769 -$43,986
Income Analysis Year 1 Year 2 Year 3 Year 5 Year 10 Year 20 Year 30
Net Operating Income $69,121 $71,345 $73,639 $78,445 $91,838 $125,671 $171,631
- Improvements -$0 -$0 -$0 -$0 -$0 -$0 -$0
= Cash Flow $69,121 $71,345 $73,639 $78,445 $91,838 $125,671 $171,631
Cap Rate (Purchase Price) 8.7% 8.9% 9.2% 9.8% 11.5% 15.7% 21.5%
Cap Rate (Market Value) 8.2% 8.0% 7.8% 7.5% 6.7% 5.4% 4.3%
Cash on Cash Return 8.5% 8.8% 9.0% 9.6% 11.3% 15.4% 21.1%
Return on Equity 8.2% 8.0% 7.8% 7.5% 6.7% 5.4% 4.3%
Loan Analysis Year 1 Year 2 Year 3 Year 5 Year 10 Year 20 Year 30
Market Value $842,945 $889,307 $938,219 $1,044,261 $1,364,807 $2,331,288 $3,982,177
- Loan Balance -$0 -$0 -$0 -$0 -$0 -$0 -$0
= Equity $842,945 $889,307 $938,219 $1,044,261 $1,364,807 $2,331,288 $3,982,177
Potential Cash-Out Refi $632,209 $666,980 $703,664 $783,196 $1,023,606 $1,748,466 $2,986,633
Sale Analysis Year 1 Year 2 Year 3 Year 5 Year 10 Year 20 Year 30
Equity $842,945 $889,307 $938,219 $1,044,261 $1,364,807 $2,331,288 $3,982,177
- Selling Costs -$50,577 -$53,358 -$56,293 -$62,656 -$81,888 -$139,877 -$238,931
= Proceeds After Sale $792,368 $835,949 $881,926 $981,605 $1,282,919 $2,191,411 $3,743,246
+ Cumulative Cash Flow $69,121 $140,466 $214,104 $368,553 $800,132 $1,896,038 $3,393,948
- Initial Cash Invested -$814,980 -$814,980 -$814,980 -$814,980 -$814,980 -$814,980 -$814,980
= Net Profit $46,509 $161,434 $281,050 $535,179 $1,268,071 $3,272,469 $6,322,214
Internal Rate of Return 5.7% 9.8% 11.2% 12.2% 12.7% 12.6% 12.3%
Return on Investment 6% 20% 34% 66% 156% 402% 776%

Buy and Hold Projection


Purchase Info
Purchase Price $799,000
+ Buying Costs $15,980
+ Initial Improvements $0
= Initial Cash Invested $814,980
Square Feet 9,248
Cost per Square Foot $86
Monthly Rent per Square Foot $0.87
Income Monthly Annual
Gross Rent $8,026 $96,312
Vacancy Loss -$401 -$4,816
Laundry $0 $0
Operating Income $7,625 $91,496

Expenses (% of Income) Monthly Annual
Insurance (4%) -$323 -$3,877
Management Fees (8%) -$610 -$7,320
Taxes (5%) -$398 -$4,771
Misc. (7%) -$534 -$6,408
Operating Expenses (24%) -$1,865 -$22,376
Financial Metrics (Year 1)
Annual Gross Rent Multiplier 8.3
Operating Expense Ratio 24.5%
Cap Rate (Purchase Price) 8.7%
Cash on Cash Return 8.5%
Net Performance Monthly Annual
Net Operating Income $5,760 $69,121
- Year 1 Improvements -$0 -$0
= Cash Flow $5,760 $69,121

Assumptions
Appreciation Rate 5.5%
Vacancy Rate 5.0%
Income Inflation Rate 3.0%
Expense Inflation Rate 2.0%
LTV for Refinance 75.0%
Selling Costs $47,940

Purchase Analysis

Purchase Info
Square Feet 9,248
Purchase Price $799,000
Initial Cash Invested $814,980
Income Analysis Monthly Annual
Net Operating Income $5,760 $69,121
Cash Flow $5,760 $69,121
Financial Metrics
Cap Rate (Purchase Price) 8.7%
Cash on Cash Return (Year 1) 8.5%
Internal Rate of Return (Year 10) 12.7%
Sale Price (Year 10) $1,364,807

Updated 7 months ago

read the report from the bottom .up.

the report has to be read from the bottom , up. thanks again

The expenses are only 25% of rent?  When they talk about apartments on the podcast i think they usually say its over the 50% rule, somewhere around 60%.  I don't see maintenance and Cap Ex specifically listed anywhere other than "misc" 7%.  I'm concerned that you are not budgeting enough for maintenance expenses.  

How confident are you about the 5.5% assumption for appreciation?  Thats great if that true for the market, but risky to assume that if you're not sure.  

What did you use to do the analysis, a website or spreadsheet?

Originally posted by @Derek Kirkwood :

The expenses are only 25% of rent?  When they talk about apartments on the podcast i think they usually say its over the 50% rule, somewhere around 60%.  I don't see maintenance and Cap Ex specifically listed anywhere other than "misc" 7%.  I'm concerned that you are not budgeting enough for maintenance expenses.  

How confident are you about the 5.5% assumption for appreciation?  Thats great if that true for the market, but risky to assume that if you're not sure.  

What did you use to do the analysis, a website or spreadsheet

@Derek Kirkwood I did see that misc 7%. which is a red flag for me. that report was sent by the agent .  you point  are great Derek.  now questions I should ask the agent? thanks

@Jackson H.   Way to much information for me to wade through.Then again not enough information. 

I don't know what assumptions you made. What do you forecast as your exit cap rate? Have you figured in the cost of sale upon exit?  Have you adjusted for a new tax assessment based on your purchase price? What are you using to figure cap rate and Cash on cash returns in future years?  (you only purchase the property and put out cash the first year)  What rates are you assuming for a cash out refi? What interest rate are you assuming for the purchase? Why have you assumed 3% growth in rents but only 2% growth in expenses? Why is the property going to grow in value at 5% if income is only going up 3%. Are you actually planning on more cap rate compression? 


As mentioned above, your expense ratio seems very low. I bet your management expense is not counting costs of tenant placement or costs of evictions.  You are counting on 7% covering not only unit repairs but exterior building maintenance, landscaping, turnover costs, utilities, trash, licenses and registrations, professional fees like legal and accounting, pest control, and a multitude of other things that will crop up. 

To sum up I think you have two major areas to look at

  • Your expense ratio - it is way to low
  • Risk of cap rate decompression.  We have historically low interest rates and cap rates. i wouldn't count on that for a 10 year exit.

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