Is this Rental analysis Cash-on-Cash Return good enough to convince investors to join your team???

Question

I am writing a business plan to send out to couple investors. Here is the financial projection and my selling point to them.
Please criticized and reveal any flaws of my analysis.

6 -12 units that can be purchase for 520k of under. The amount 520k represents 65% of market value of properties recent sold in the past 6 months. I will be interested in 2 bedrooms and up.
Purchase Price: $520,000 using the high value
Down payment: $ 104,000 -------20% down from an investor
Improvements: $50,000 represents 10% of purchase price -------- Improvements technological amenities- energy efficient appliances- some remodeling.
Closing: 570,000 x 2% = 11,400
Total: 581,400 ARV --------- Represent 72% of current market value.
Finance Amount: 581,400-104,000 = 477,400
Interest Rate @ 8%
Mortgage years: 360 months
Mortgage Payment: $3503

Revenues:
Letâ€™s assuming each unit rent for the minimum rent in the area. For 1 bedroom (900-1150); for 2 bedroom (1050-1350) and for 3 bedroom (1200-2100). Let say for a 6 unitâ€™s apartment, 3 of the units 2 bedrooms and the other 3 are 1 unit.
For the 1 unit; 3 x 900= 2700
For the 2 units; 3x 1050= 3150
Other income from storage, wireless, laundry and water = $1000 @ 200 person
Rental income: 4,800 monthly for 5 units and one 2 bedroom unit vacant. 
Gross rental income: 5,800 monthly and 69,600 yearly.

Expenses:
â€¢	Property Taxes : 8,000 ------  use the highest number
â€¢	Insurance : 4,000 ----------- use the highest number
â€¢	Maintenance ----------5,000
â€¢	Management  @ 6% of rent -------------------------------- $3,456
â€¢	Advertising (to advertise for tenants) --------------------- $ 500
â€¢	Utilities ------------------------------------------------------ $pay by tenants
â€¢	Other (anything else we may have missed above) ------ $1,000
   Total: 16,956
NOI
69,600 â€“ 16,956    = 52,644
Cash Flow
52,644-42,036 = 10,608
Cash-on-Cash Return
10,608 /104,000   = 10.2%
The investor makes $ 10,608 yearly for at least 5 years plus the original investment at the end. When I refinance.

Brendan J. · Answer

Dee,

There are much smarter people on this forum that will probably chime in, but I see several problems with your math. I'll just go through them in the order I see them.

1. 20% down on this type of investment seems fairly low. I would anticipate more like 25% - 30%. So our first problem is that this makes the down payment more like $150K.

2. Improvement costs listed as a % of sale? You're setting yourself up for disappointment with that way of calculating. If I were an investor, I'd want to see inspections and quotes by registered GC's and their best guess as to the improvement costs. I've seen single family homes easily need this much money to fix up, so I'd bet that this will probably be higher than you think. Because we don't know, we'll leave it as is.

3. You probably won't get a 30 year term on an investment like this, I'd be safer and list this as a 20 year.

4. There are some very large holes in calculating these rents. If I were an investor looking to give you money, I'd want a much firmer picture of what the property will rent for.

5. There is no way that you're going to get $200 per apartment for wireless, storage, and laundry. I'll be generous and put this at $75 per unit. BTW, don't account for vacancy here. We'll use the 50% rule below to calculate it in.

6. There are so many expenses that are left out of this equation to list. We'll just use the 50% rule to make a rough estimate.

$5850 in monthly income plus the $450ish I gave you for the other income is $6,300. $3,150 goes to expenses and leaves $3,150 for your operating income.

$600,000 loan with 25% down, for 20 years, @8 % interest is $3,763.98 per month.

$613.98 loss per month or, a $7,367.76 annual loss.

- $7,367.76 / $150,000 = - 4.9% annual ROI

My advice is to do more homework, but be prepared for the fact that you'll probably come up with my same conclusion...

This isn't a good property at this price.

David Beard · Answer

Dee -- organize your data in a spreadsheet, format it in a professional manner, upload to Google docs/spreadsheets, then post the link here.  It needs to look polished and convey that you are professional, experienced, successful, organized, and attentive to detail.