6-unit property, great cap rate...what am I missing??

Question

My partner and I are in negotiation for a 6-unit property in NE Ohio, below are details:

• 4 rented, 2 vacant / average rent $735 (4 rented units $720, 2 vacant $775)Owner pays water, sewer, trash
• Owner pays water, sewer, trash
• 2 br, 1.5 bath, roughly 900 sf
• Garage with door + extra parking area
• Roof in good shape, air and furnace in good shape
• Realistic gross all units filled: monthly $4,400 / yearly $53,000
• We walked through both vacant units, very clean and basic. Could probably add $500-1,000 into each unit for cosmetics, but not necessary, ready to rent 
• We are discussing purchase price between $370,000-$385,000. Seller may be interested in seller financing, but hasn't decided yet. 
• With numbers above, cap rate is 8.9%.

• Owner pays water, sewer, trash

Seems like a great deal with very little downside. Would love some others thoughts. Am I missing something???

I've done a number of wholesale deals, never multifamily. I own 6 rentals but those were purchase almost 9 years ago.

Chase McArthur · Answer

@Shawn Hershberger

I second @Steve Hall. There's way too much information that is missing to be able to accurately determine whether this is a good deal or not. Just a quick look at your numbers, if only 4 units are currently occupied that puts GRI @ $34,560. Assuming expenses are 50% that puts NOI @ $17,280. An 8.9 cap would put the value @ $194,157. By those calculations you're about to offer ~$176,000 more than the property is worth as it sits.

Should you decide to gamble on your crystal ball and you manage to achieve 100% occupancy with an average rent of $735 a unit, that puts your GRI @ $52,920. Again, assuming 50% expense ratio that puts NOI @ $26,460. An 8.9 cap would then put the value at $297,303. By those calculations you're still offering ~$73,000 more than the property is worth.

Using the first calculation, if you purchase @ $370,000 you just bought a 5 cap property. Assuming your terms are good, 25% down another $3000 in improvements your in ~$96,000. Bump rents to $775 puts GRI @ $55,800, NOI $27,900, DS ~$16,500, Net $11,400, that puts CoC at 12% and that's in a perfect world. Miscalculate anything and that 12% evaporates.

I would love to see more info, but as it sits offer less money or walk away.

Steve Hall · Answer

@Shawn Hershberger

There could be LOTS of things you are missing! Based on how little you've told us, my guess is that you've probably missed a lot.

You didn't tell us anything about expenses. Is that an 8.8% cap for self managed? Did you run the numbers? Do you have a BP report for us? How much is the water/sewer? Do you have a T-12 P&L and rent roll? Why are 2 units vacant? How long have they been vacant? And why do you think those 2 could get $55 more per month? Did you read the 4 leases? Are you paying cash? Is the property in a flood zone? If not what are you figuring for debt service? What's the ARV?  What's the cash flow?