Congratulations on getting far enough to evaluate a deal and having the guts to post it! Not every deal is going to be great and that is what BP is here for.
Notice how your Cash on Cash return is negative up until year 5? That means you will be losing money for the first five years. It's also unlikely that you will be able to get a 30 year term on a commercial property. These are generally 20 years and you will need to refinance somewhere in the middle like at 5 years. Your debt service will be higher and this will push down your returns further. If you have the money to 'subsidize' it and you are in it for the long haul, then you will likely have an income producing property. The problem is that it will stunt your real estate growth because you won't have the money to invest in other properties.
Based on your numbers, it's clearly not. A few comments:
1. You're paying $525K for an asset that will generate $3.8k in rent, that's low (see the 2% / 1% rule)
2. Your expenses (including P&I) are high. $4.1k of expenses for $3.8k in rent is a no-go (or at least it will be a big cash drag)
3. As a result, cash flow is heavily negative. Cap rate and Cash on cash are low or negative too. If you were to calculate the IRR, it would be pretty low too. So getting the hassle of managing 6 units and levering yourself up with debt for this kind of return is not something you should consider.
So unless the asset is in an exceptional area and you expect it to appreciate significantly in the future, I would stay away from it (this is obviously not a cash flow play here)
Congratulations on getting far enough to evaluate a deal and having the guts to post it! Not every deal is going to be great and that is what BP is here for.
Notice how your Cash on Cash return is negative up until year 5? That means you will be losing money for the first five years. It's also unlikely that you will be able to get a 30 year term on a commercial property. These are generally 20 years and you will need to refinance somewhere in the middle like at 5 years. Your debt service will be higher and this will push down your returns further. If you have the money to 'subsidize' it and you are in it for the long haul, then you will likely have an income producing property. The problem is that it will stunt your real estate growth because you won't have the money to invest in other properties.
Thank you both for responding and I wish I had the ability to add more clarity to the question I really have which is how do these types of realestate deals sell when they clearly are not giving a return that's viable. I am seeing this situation all the time and I know that a good portion of buyers are investors like me so I don't understand why people buy these properties when clearly they don't pencil and yet for the last year I have watched this happen over and over again. Tell me are there really that many folks out there that don't know how to do simple math
There are a fair amount of investors who are willing to put in a larger portion of their cash into the deal. As an example, try doing the calculator again, but bring 75% cash (the bank loan is 25%) and you will see that your cash on cash goes positive. It's positive because your monthly debt service goes way down. It is small because you have that large denominator (the cash you had to put in). The lower the cash you have to invest, the higher the return is (as long as you get a return).
The debt service eats up a very large chunk of your monthly gross revenue. Not always a bad thing if you are doing the long play and looking to take a loss on paper for depreciation. Also not a bad thing if you don't have a lot of money to bring into the deal. Back to your question: investors with a large amount of capitol will look at the deal differently from you and are able to pay more. At this phase of the market everybody with money but not always sense is looking for a place to invest. Real Estate looks great right now. Prices go up and the great deals are harder to find. Keep looking, though and you will find them.
THANK YOU! I am always trying to stretch my dollars, but could see with a 1035 exchange where this may make sense. Did not think of it from that standpoint. I have watched so many sales lately that just do not make sense. Thank you for shedding light...!