Are my calculations correct ?

15 Replies

Hello,

These are made up figures. I just want to see if I am calculating this correctly. Any advice/opinions are welcome.

Thank you.

Bought for 280,000

20% down payment = $56,000 ( $280,000 x 20% = $56,000 )

loan = $224,000 ( $280,000 - $56,000 = $224,000 )

30 years

7% interest

Loan Amount = $1490.27

Taxes = $400 per month

Insurance, Maintenance, Expenses = $600 per month

$1490.27 (Mortgage) + $400 (Taxes) + $600 (Insurance, Maintenance, Expenses) = $2490.27

4 units at $1,000/ unit = $4,000

$4,000 x 15% vacancy = $600

$600 - $4,000 = $3,400

$3,400 - $2,490.27 (total expenses) = $909.73 (net cash flow)

$909.73 x 12 months = $10,913.76 (net operating income)

$10,913.76 divided by $56,000 = 19% cash on cash

$10,913.76 (net operating income) divided by $280,000 (asking price) = %3.8 cap rate

I think that getting a loan for 100% of purchase price on a quad is optimistic. In a SFR you might argue that appraised value is greater than what you are paying, but I think that gets to be a much tougher sell in multiunits. I would never finance that much because I'm too conservative, so maybe I just don't know how high they'll go on these types of properties.

Originally posted by "BSM":
Insurance, Maintenance, Expenses = $600 per month

This seems low to me, but that may just be me. I would typically include repairs here, as well. Again, I'm probably more conservative than most around here.

Originally posted by "BSM":
$909.73 x 12 months = $10,913.76 (net operating income)

You generally calculate NOI as income minus expenses, but debt coverage is not included in the expenses. So the real NOI is much higher than this. [Think of it this way, NOI is independent of how the building is financed.]

Originally posted by "BSM":
$10,913.76 (net operating income) divided by $280,000 (asking price) = %3.8 cap rate

I'm not sure what "asking price" means. Who's asking? I would look at NOI over what I actually paid (and I include it all, like closing costs and repairs, too, even though not everyone does that -- I'm basically looking at return on total investment). If you're trying to divide by what the property is "worth" you will run into a circular argument, since at quads and higher the market tends to set a cap rate and the prices follow, rather than the other way around.

With your numbers, this thing is going to have a very good cap rate (around 13%) but I think your sale price may be overly optimistic for a quad with gross rents of $4000/month. Just my opinion.

I think that getting a loan for 100% of purchase price on a quad is optimistic. In a SFR you might argue that appraised value is greater than what you are paying, but I think that gets to be a much tougher sell in multiunits. I would never finance that much because I'm too conservative, so maybe I just don't know how high they'll go on these types of properties.

I'm putting down 20%

You generally calculate NOI as income minus expenses, but debt coverage is not included in the expenses. So the real NOI is much higher than this. [Think of it this way, NOI is independent of how the building is financed.]

How come debt coverage is not included in expenses ? Why is this ? Your debt is a great deal of "overhead" in your property.

The best way to think about debt service cost is that it is independant of the operating income of the building. Debt service needs to be figured into your over all operationg costs however. Cap rate is always figured on a cash basis as your loan costs will not be the same as the next guys. There is a great tool to help you figure out all the numbers on the proerty here is the link.

http://www.biggerpockets.com/recritic.html

Good luck sounds like a great find. Is it being delivered fully occupied?

Hi Ohio Realtor,

Thanks for the response. I will check out the url link you provided.

Good luck sounds like a great find. Is it being delivered fully occupied?

Sorry to say but I just made the numbers up in my head. I wanted to see what other people thought on how I analyze a deal lol and see if I did it right ? cash on cash, cap rate etc...

I was a little off in my analysis but not that bad, the calculator in projecting a yearly income of

I added on a little more to my monthly expenses.

Gross Rental Income $4,000.00 $48,000.00
Vacancies ($600.00) ($7,200.00)
Gross Operating Income $3,400.00 $40,800.00
Expenses ($1,250.00) ($15,000.00)
Net Operating Income $2,150.00 $25,800.00
Debt Service ($1,342.00) ($16,115.00)
Before Tax Cash Flow $807.00 $9,685.00

Theres a few things I don't understand,

How is the cap rate 9%
I'm getting ( 9685.00 / 280,000 = 3.4 % )

Financial Ratios
Gross Multiplier 6 %
Cap Rate 9 %
Internal Rate of Return 17 %
Yield 17 %
Debt Coverage Ratio 1.60 1.64 1.68 1.73 1.77
Loan to Value (LTV) Ratio 80% 75% 72% 68% 64% 61%
Ownership Percentage 24% 27% 31% 35% 38%
Cash on Cash Return (BT) 17 % 18 % 19 % 20 % 22 %
Cash on Cash Return (AT) 15 % 16 % 17 % 17 % 18 %

How do you read and understand the cash flow page ?


Net Operating Income (NOI) 25,800 26,466 27,148 27,843 28,554


Debt Service -16,115 -16,115 -16,115 -16,115 -16,115


Before Tax Cash Flow 9,685 10,351 11,033 11,728 12,439


Depreciable Allowance -8,145 -8,145 -8,145 -8,145 -8,145


Mortgage 1 Interest -13,365 -13,195 -13,015 -12,824 -12,621


Taxable Income 4,290 5,126 5,988 6,874 7,788


Taxes Due -1,072 -1,281 -1,497 -1,718 -1,947


After Tax Cash Flow 8,613 9,070 9,536 10,010 10,492

How come the cap rate is now 9.21 % ?

Gross Multiplier (Price/GSI) 5.83
Cap Rate 9.21 %
Internal Rate of Return 17 %
Yield 17.00 %
Debt Coverage Ratio 1.60 1.64 1.68 1.73 1.77
Loan to Value (LTV) Ratio 80 % 75 % 72 % 68 % 64 % 61 %
Ownership Percentage 24 % 27 % 31 % 35 % 38 %

Originally posted by "BSM":

How is the cap rate 9%
I'm getting ( 9685.00 / 280,000 = 3.4 % )

cap rate is NOI/purchase price. You are using cash flow instead of NOI. Those two are only equal if you buy the building for cash (i.e., debt service is zero).

Originally posted by "BSM":
I'm putting down 20%

That makes more sense. Before you edited the original post, it said you were buying it for "20% less."

If the property had 1250 per month in expenses in addition to 1342 debt service I think that I would have to look hard at it.

I found 1 deal where the people were paying 2800 annual for insurance and 150 per month yard maintance. Insurance should run 550 and yard maint should be 0 as I do it. 2100 per month income on a four family on market for 164k she let me know she has 1 vacancy and that she has to do an eviction so have to see how that goes. A property that has 2 vacancies and 2 month to month tenents is worth less in January. You have to pay utilities on you vacancies about 150 a month on each.

cap rate is NOI/purchase price. You are using cash flow instead of NOI. Those two are only equal if you buy the building for cash (i.e., debt service is zero).

Whats the NOI ?

If the property had 1250 per month in expenses in addition to 1342 debt service I think that I would have to look hard at it.

I found 1 deal where the people were paying 2800 annual for insurance and 150 per month yard maintance. Insurance should run 550 and yard maint should be 0 as I do it. 2100 per month income on a four family on market for 164k she let me know she has 1 vacancy and that she has to do an eviction so have to see how that goes. A property that has 2 vacancies and 2 month to month tenents is worth less in January. You have to pay utilities on you vacancies about 150 a month on each.

Are you saying that my expenses are to consertive ?

No your expenses are way to high for the income on the property. There is no way expenses should be almost 1/3 of your units income.

Some people say " have of your rental income divded by 2 " is your expenses ( This is excluding your mort. ) and whatever is left over is your profit ? Please advise.

Look at your home are your expenses 1/2 of fair market rental to maintain the home? There will be additional expenses with rental property but you should be able to keep them under control if you have your rentals close by.
Recent repairs on 4 family.
Sept-- repair screen door--costs 8.00 for screen 1hr labor, replace light fixture cost 18.00 1 hour labor
Oct-- Water leak in roof Temp patch to valley--- costs paint 68.00 (5 gal)
roller covers 6pk 9.00, drywall compound 0.00 (left over from previous repair) 10 hours labor, professional repair to slate roof and replace 2 valleys 750.00
Nov-- Repair toilet-- rebuild kit 16.00 shutoff valve 4.00 short flex line 4.00 labor 1hour.

If I had to pay for labor on these repairs it would have driven the price way up. That is why until you reach a critical mass you want your rentals within reasonable distance. Add an additional 12 hours for grounds maintanance for the 3 month period and you can see the cost benefit of doing most repairs yourself.

If I had to pay for labor on these repairs it would have driven the price way up. That is why until you reach a critical mass you want your rentals within reasonable distance. Add an additional 12 hours for grounds maintanance for the 3 month period and you can see the cost benefit of doing most repairs yourself.

What happens if you can't do them yourself ? and you have to pay someone ?

the cap rate is too low....
i have not check it ....
but looking at it quickly

it is too low either way...
i would not touch any property now unless its near 10% cap rate.
7 or below is too risky in my opinion....

thanks

sunsmicro