Cash flow numbers seem low - What am I missing?

Question

I've begun poking around and looking at relatively small (8-15 unit, <700K) mult-unit apartment complex units.   Initially, the numbers don't look all that great.  Purely an example, I chose a property on loopnet.  This one has a high cap rate of nearly 10%.  Most have lower advertised cap rates.

http://www.loopnet.com/Listing/19631386/1260-McDiv...

I'll be optimistic and say that NOI they list is accurate at 50K.

Rent = 79,500 /year

NOI = 50K

Debt service payment/year (25% down, 5.5%, 20 amort.) = 26K

Capital expense fund/year = 6K

Cash flow then is 18K per year.  I wouldn't be surprised if the advertized NOI does not include a management fee, but I'll assume it does.

16K per year after investing 85K loan down payment for the loan results in an 16.9% cash-cash return.  Not a horrible return, but this is also assuming there are no bumps in the road.  That 16.6% could easily turn into low teens.  Most units are even lower cap rates which makes number look even worse.

Is my high level analysis way off?  I had a conversation with a commercial real estate broker that is a family friend and he was quite pessimistic on the topic of purchasing an apartment complex. His thought is iff I have property management I won't make any money on the deals unless I pay all cash.

Chris Soignier · Answer

Expenses of $20K look very low to me, which implies that the owner may have been doing a lot of things (PM, repairs, etc.) that should have been outsourced, or books are inaccurate.     Quite frankly, I'm skeptical of any deal I see on loopnet, since the best ones get scooped up before they hit it.

David Thompson · Answer

Nick,

You are one of many.  You could start w/smaller MF and move up (slower IMO)  or you can go to 100+ or above units, find some partners who have the same aspirations you do or have done it. Understand what you bring to the table and what you want from others on the team.  More cash, experience, active, passive roles, etc.  Lenders will appreciate someone on the team w/experience. Look into syndication is a possibility if you more money (OPM) than what the partners can bring to the table.  This is a good read on getting into syndication from a variety of paths as well from my coach Joe Fairless.

https://www.biggerpockets.com/forums/223/topics/31...

Dave

Nick Rose · Answer

Jason Hirko-

Thank you for the excellent points that need to be considered.  I do get a the feeling I'm stuck in the middle of the market.  I have enough startup capital to get a multi-family unit complex, however I don't have enough to get into the larger complexes and get some of the economies of scale benefits.

Jason Hirko · Answer

@Nick Rose the other thing to keep in mind is that the cap rate/noi are dependent too on the owner. Small apartments in particular depend so much on how they're run, that they're much less like any other real estate investment. As an example, take the guy who owns 50 of these little 8-plexes... He has systems in place where this can just be rolled right in, that doesn't change his overhead, and his variable costs will be much lower than someone else's because he probably has a maintenance guy on staff and an office person to fill up vacancies. He might look at this and say I can bump this from a 16% cash return to a 20% because I'm that good at it. On the other hand, someone without much experience gets in thinking it will be passive income, winds up paying a PM 8-10%, and before you know it, the same property is an 8% cash on cash.

Nick Rose · Answer

Josh/Chris-

Thank you both for your input.  I agree that 16% would be a decent return, however that return is assuming a lot of home runs.  (NOI (expenses) is accurate, no out of ordinary major cap expenses, etc)  To Chis's point, I would think most financials on loopnet are off a bit from reality.  There will likely be more expenses and the return will end up being even lower.  It wouldn't take much to realistically bring down ROI to 10-12%.

Nick Rose · Answer

Correction: Current rent is 70K/year

Cash flow numbers seem low - What am I missing?

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