Did I Analyze Correctly?

Question

The deal

https://www.loopnet.com/Listing/4300-Rosslyn-Rd-Houston-TX/16820570/

Down payment is 25% of purchase price so I got 948,750 with remaining principal of 2,846,000.

Income 7 of the units rented for 8050 and 20 units rented for 25,000 giving me annual income of 61,920 and monthly income of 12,000.

Expenses I was told by GC that you take 40% of your gross income to calculate expenses. Which is fair, it ended up geting 61,920 in expenses coming out to 5160 monthly.

For the debt I used a 6% interest rate is this correct? This is where I get confused with analyzing deals. With a 6% interest rate I came up with 170,775 annually and 14231 monthly.

So the CASH ON CASH return is 55,000 annually and 4578 monthly. Giving you a 5.7 ROI.

This doesn't seem like a good deal. Are my numbers off? My last question is how would I calculate repairs into this?

Thank you!

Guifre Mora · Answer

How did you calculate mortgage payment?

Garret Coffman · Answer

@Guifre Mora

I don’t get how you used excel for the debt... 😑

Guifre Mora · Answer

Look at the offering memorandum. In the Loopnet link.

It gives you the actual Profit and loss of the property. Rents are offered based on average but the actual RENT ROLL in the offering memorandum. Witch is $32,650x-5% vacancy = $31,017

27 Unit Apartment

7x1150=8050, 20x1250=25000, 8050+25000= $33,050 (average) Some rentals are offered at a discount to attract new tenants and then raised per year. RENT ROLL is $32,650x-5% vacancy = $31,017....But look at the due dates they are old so this rent roll is not current.

Again look at the offering memorandum: The actual Annual Operating expenses are $147,872/12 = $12,323.

Closing costs As a broad rule of thumb closing costs usually range from 2-5% of the purchase price and include things such as loan fees, discounted points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, credit report, etc I calculated it at 1%.

Monthly Mortgage Payment (PI) Exel Formula:

=IF(2846000=0,0,-PMT(6%/12,30*12,2846000)) ... change the numbers to the cells they represent.Total Annual Debt Service = Monthly Mortgage Payment (PI) *12.... $17,066.21*12 = $204,758.50

Yes, you are not that off. Higher LTV might work but also calculate the time it takes you to recoup your initial investment and start making money...

Garret Coffman · Answer

@Guifre Mora

Incorrect. Monthly income after the vacancy rate is $31017.50 per mo. I'm confused on how you added to the vacany if I got 25,000 a month before adding to vacancy shouldn't it be less? You came up with $31,017. Incorrect. Monthly Operating Expenses $12323.33 Now you just took 40 percent of the 31,017 you came up with. Incorrect. Total Annual Debt Service $204,758.50. $17,063.21 per month. You are also missing closing costs into the deal. So how did you figure this, even with adding 37,000 into down payment of 948,750 I get 56,925. At this point I'm seriously lost.Incorrect. Total Monthly Cash Flow (before taxes) $1630.96. ($19,571.54 per Y) Cash on Cash Return (ROI) 1.98%. (I included 37K in closing costs 1%) This would be easy to figure out once I figure how you got the total annual debt service. I see that I'm not entirely off, I just did not include my closing costs and vacancy rates. The down payment needs to be much higher to meet at least 3x the asking price.I need a higher loan to value ratio.

Guifre Mora · Answer

Garrett, your calculations are off. But your gut feeling on the deal is a correct terrible deal. But I'll explain.

The down payment is 25% of the purchase price so I got 948,750 with a remaining principal of 2,846,000. Correct

Income 7 of the units rented for 8050 and 20 units rented for 25,000 giving me an annual income of 61,920 and a monthly income of 12,000. Incorrect. Monthly income after the vacancy rate is $31017.50 per mo.

Expenses I was told by GC that you take 40% of your gross income to calculate expenses. Which is fair, it ended up getting 61,920 in expenses coming out to 5160 monthly. Incorrect. Monthly Operating Expenses $12323.33For the debt I used a 6% interest rate is this correct? Correct assumption. But optimistic if you think you could do better. You also need to consider net worth for a property this size. Lenders will look for a 1:1 ration on your network and also experience.

With a 6% interest rate I came up with 170,775 annually and 14231 monthly. Incorrect. Total Annual Debt Service $204,758.50. $17,063.21 per month. You are also missing closing costs into the deal.

So the CASH ON CASH return is 55,000 annually and 4578 monthly. Giving you a 5.7 ROI. Incorrect. Total Monthly Cash Flow (before taxes) $1630.96. ($19,571.54 per Y) Cash on Cash Return (ROI) 1.98%. (I included 37K in closing costs 1%)This doesn't seem like a good deal. NO. But with your assumption on 25% down and corrections, your ROI is below the national inflation rate. Meaning your money is not growing but losing value. Also, your DSCR is below the standard 1.25%. You would need to raise your down payment to $1,320,000 (65.2% LTV) for the DSCR to be at 1.25%. No Bank will lend bellow this mark. Also, look at the 1% rule, this property is at .86%.Are my numbers off? Yes.

My last question is how would I calculate repairs into this? You would allocate a CAPEX % monthly in your operating expenses. In your due diligence, you would ask for a P & L showing mayor repairs and or Capex repairs. The appraisal inspection would also show if any new repairs were performed or needed by the age of the building and how well it has been maintained. This property was rehabbed in 2018 so warranties might still be in place so assume not much needed in repairs.

Depending on the area you buy in, a property that doesn’t quite meet the one percent rule could still be a lucrative longer-term investment opportunity based on how it appreciates. It all boils down to your investing style, goals, and risk tolerance. The point is, using a single metric like the one percent rule doesn’t paint the entire picture of investment potential.

Garret Coffman · Answer

@Bjorn Ahlblad Yea I think you could get better than 6% especially in 2020. I don't think this deal would make sense even with a lower interest rate. This place is completely rehabbed as well, just needs a lower price almost 4 million...

Bjorn Ahlblad · Answer

@Garret Coffman I think you could do better than 6% but I don't know what that rate might be. The repairs/rehab could be all over the map. I'd have a contractor tour the place with you if you planned to proceed.

Garret Coffman · Answer

@Bjorn Ahlblad Wonderful!

I have a few more questions...

Is the 6% interest rate good to use for most multifamily investment properties?

What about repairs how do I calculate those into the deal if let's say 1/3 of the units?

Bjorn Ahlblad · Answer

@Garret Coffman you analyzed correctly there is no money to be made there. The per door price is way too high for those rents. All the best!