1st Multi-Family Deal- AM I CRAZY???

Question

I've had good success following the 1% rule on my sfh properties and am seeing good $$ flow (8-10% 1st year coc return on a 15 yr note) but I have not done a very good job analyzing properly my first commercial property.

Price is 480k and these numbers are accurate with full occupancy. The only variable in this is that the gross rents could probably come up to about $4200. This commercial property does not currently meet 50% rule. I made the mistake of running the initial numbers based off of downpayment of 57% from a 1031 exchange in which case it cash flows $735/month at full occupancy but even in this scenario 1st year coc return is 3.14% Clearly, I do not want to overpay for this property and give up my hard won 1031 equity. What do you think its worth based off these numbers? Thanks!

David Spear · Answer

Update-Passed on the 6 plex and very happy that I did. I learned a lot along the way especially when it comes to commercial lenders. I ended up purchasing a duplex in cash with my 1031 equity and 2 SFR, with conventional loans. Combined, I'm seeing about $2k a month in pure cash flow.

Ty Ottaberry · Answer

I am analyzing a deal ☆VERY☆ similar to this. The purchase price on the property that I'm dealing with is $220k. The income & operating expenses are nearly *exactly* the same. $480k is over paying if you ask me . If you would like to partner with me your more than welcome

David Spear · Answer

HI Jaysen and thank you for the response.

1. A 6 unit apartment, all 1 bedroom 750 sf

2. Washer/dryer already n each unit. No garages or storage spaces to potentially increase the income.

3.the cap rates for this area seem to fall between 5-6%

4. I've spoken with quite a few lenders and bc it's more than 4 units, I can only go with the commercial loan route. 3.75% on a10 year note amortized over 20 years with a balloon payment at the end of 10 years. A 30 year would be great but I have not been able to find that on the commercial side.

5. This is a Midwest property

Noted on the vacancy #. "Other expense" covers water, trash, landscaping and cap ex(5%)

Im using 5% for maintenance since it's a newer 2010 building.

I think there is more margin on rents here based on some of the comps, definitely possible to hit $750 per unit with full occupancy but I want to be conservative and base everything off of the actual rental income. Thanks for your insight on this deal...

Jaysen Medhurst · Answer

A few questions and few things to think about, @David Spear:

• How many units is this?
• Is there an opportunity for other income from coin-laundry, vending, renting storage space, garages, etc.?
• What is the prevalent cap rate for similar properties in this area? This will determine your valuation and offer.
• How much have you shopped around for loans? That interest rate is pretty good for a commercial loan, but a 30-year amortization would be a terrific option. Talk with some local CUs.
• Is this property in San Diego?

As far as your analysis:

• 5% is a bit low for Vacancy. This is obviously very localized, but I use 8% in my underwriting.
• What is covered in "other?" You really want to break out all of your expenses. Does this cover water/sewer, house electric, lawn care, trash removal, pest control, admin/professional costs?
• What about CapEx? I don't see that as a line item. I usually figure 5-10% depending on the property. As long as you're in the range of 15% when combined with repairs, you're probably good. Remember, this is a "below the line" expense, it does not impact NOI.

I'd like some more clarity on your numbers, Cap Rate, etc.

David Spear · Answer

10y/20y amortization loan with a balloon payment after 10 years. 3.75%

5k closing costs, 3k in repairs

1st Multi-Family Deal- AM I CRAZY???

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