I am looking for Cash Flow properties in A- to C+ areas. I found a 3 building 6 unit listing on my local MLS and I believe that I may be looking at this deal wrong. Can you help me out with my analysis?

Thanks in advance!

Details in MLS

Units: 6

Taxes: $5874 (annual)

Gross Income: $48,600 ($675 per month)

Net Operating Income $38,838

Total Expenses: $9762

Vacancy Rate: 5%

Asking Price: $449K

Owner pays Trash & Water

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Based on the expenses I am assuming that the property management is completed by the owner and that they are including ~$4K a year in insurance.

I ran the numbers in my own Deal Analyzer and I added:

5% of Effective Gross Income as Maintenance Expense

10% of Effective Gross Income as Property Management Expense

Bumped the vacancy rate from 5% to 10%

Insurance: $3000 (annual $500 per door)

Water: $3240 ($45 per door - typical in city)

Trash: $1,800 ($25 per door - complete guess)

$12K for improvements ($2k per door)

20 year note @ 5% with 20% down (assuming full asking price)

2% Closing costs

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My numbers show a Cap Rate of 5.7%, cash on cash return of -5.12% and -$1,668 of annual cash flow.  Am I missing something here or is this just a terrible deal at this purchase price?

Other details in MLS

Each Unit is 2 Bedroom

Acreage: 1.35 acres (room to build more)

Sq Ft: 6,432

Year Built: 1986

I am not sure you calculated the cash on cash correctly, but I don't have time to help you here.

The cap rate is a good start though.  Generally for Ohio, except in better areas of Columbus, this cap rate is too low.   (my opinion).

I think that you may have left out some expenses, however, you can save money if you self manage.

My first comment is that you can save money if you manage this property yourself.  If you can't, the 10% management fee is generally a bit high, but I'd keep it because you need to hire a motivated and high quality local property manager who will take this on.  

I break out leasing fees, separate from management fees.  So, if you have someone else rent out the units, you will pay for advertising and commissions.  Also, if you ever have an eviction, there are court costs and attorney fees.  Factor that in for any C quality areas.

Your maintenance expenses sounds fine.  But you have turnover costs.  When you have a vacancy, normally you paint it.  But you may have other expenses including cleaning, replacing worn out items and other repairs.  Turnovers cost a lot.

Last, inevitably there are capital items.  Every 5 years, you might have a major capital item.  Repaving the parking lot, maybe a roof.  The boiler needs major servicing.  Make sure you have an experienced inspector who also will give you an indication of life span for major systems.

I'd create a sophisticated spreadsheet with as many costs broken out as possible.  You might be able to find some good ones, even online to help you.

Hi Jeremy, please PM me, I’ll see if I can help / closer look at the numbers.

5% cash on cash. I would run far away