My first Apartment Deal - Is this a good deal?

[LIGHTBEING]

Iron Range,

I was specifically commenting on your statement regarding cashflow.  In order to determine your cashflow you must include your debt service.  There is no way around it.  Yeah, ofcourse if you pay all cash you obviously don't have debt service.  But that goes without saying.  The majority of investors will almost always leverage their properties.

I would not subtract the Net Income by the actual mortgage.  To me that doesn't not represent a true property evaluation. The evaluation of the property is what we are trying to do here.

If you wanted to figure out your cashflow you would.  I'm not understanding your position.  The bottom line is what we are trying to do here in my opinion.  Without including your debt service, how will you know your CF? 

Cap rates and other ratios are used by those who don't understand what matters.

Cap rates will give you a quick glimpse of the deal.  If it a true cap rate then you know the NOI, are you saying NOI is not important?

What matters to me is my Cash on Cash Return.  I want to know how much return I am making on my money.

What matters is whether or not the money the property produces is greater then the costs of the property. Money In Vs. Money Out.

Wouldn't the cost of the property include your debt service (money going out?)



Take this for an example:

A 100 unit apartment bldg has a NOI of $180K.  Purchase price $2M.  true 9% cap rate.  Not a bad deal at all.  income is obviously higher then expenses.  20k per unit!!!  Sweet deal!

However, the property comes with an assumable loan $1.8M @ 8.5% 25 yr am.  it requires you to put down 200k plus closing costs etc = $230k total out of pocket.

Now it may look like a sweet deal by evaluating and verifying the income and expenses but is it such a good deal with the debt service????

1.8 M @ 8.5% 25 yr am = 173,928/yr debt service.

your cashflow is a whopping $6072/yr (NOI - Debt service)

And your Cash on Cash return is 2.64% (6072/ your DP 230k)...i can do better then that in a money market savings account.

I think you get my point.  Your debt service is a very crucial part of your analysis.

[Iron Range]

No wonder you are saying you can't cashflow on apartment buildings unless you rehab.  You are basing it on 0% down.  In other words, your formula is using 100% financing??

Your above stmt is implying that the down pmt is free money.  I always include the down pmt in my calculations.  So yes, I cash flow assuming 100% financing.  I cash flow using 100% of the PURCHASE price. Why?? Because that is the purchase price. 

This is where we differ in opinion. I ALWAYS cash flow a property using the purchase price.  Whether I am putting 0 down or 100% down is not relevant in determining if the property is a good deal.  The relevant part is the purchase price, not the down pmt. 

[LIGHTBEING]

I never implied that the down payment is free.  I just recognize that a down payment is needed.  You seem to be overlooking that step.

You can't make cashflow calculations without acknowledging the debt service. 

Whether I am putting 0 down or 100% down is not relevant in determining if the property is a good deal.  The relevant part is the purchase price, not the down pmt. 


How is the down payment not relevant?  You don't want to know how much you are making on your money??  Your debt service is very relevant.  See my example in previous post.  The way you evaluate properties, you would think this was a good deal but by just simply plugging in the debt service you understand that it's not a good deal.

I'm boggled that you don't think your debt service is important when evaluating an asset.

[Iron Range]

A 100 unit apartment bldg has a NOI of $180K.  Purchase price $2M.  true 9% cap rate.  Not a bad deal at all.  income is obviously higher then expenses.  20k per unit!!!  Sweet deal!

I can take 1 second and know this is NOT a Sweet deal.  So can anyone else that has ever looked at commercial apartments.  You can go on loopnet.com and find better deals ALL DAY LONG, and pay full asking price.  I would not recommand that, but you could. 

A Sweet deal would be around 1.2M or less.

[LIGHTBEING]

Good luck finding a good operating 100 unit complex at a 15 cap !

I can take 1 second and know this is NOT a Sweet deal.  So can anyone else that has ever looked at commercial apartments.

Not without me posting the assumable loan info.  Your statement is completely false.  Infact, Institutional Investors close 7-8 caps all day long.  The deal I posted is a 9 cap.

You can go on loopnet.com and find better deals ALL DAY LONG, and pay full asking price.  I would not recommand that, but you could.

I have never seen nor do I expect to see a stablized apartment building listed on loopnet for a true 9+ cap.  But you will surely find some outrageous pro formas on there.

[LIGHTBEING]

I just did a search on loopnet for kicks.  Searched for multi-family for the past 3 mths at 9-15 caps in my area.  The only apartment complex that came up was listed at a 15 cap(proforma) but it needed a GUT RENOVATION!!!!!

Checked the rest of the country -  most 9+ caps were proforma and in either need of a renovation/reposition or just not in very desireable areas

Let's just agree to disagree here and move on.....  I will continue to evaluate cashflow by including my debt.

[multifam]

Iron Range I'm trying to understand the formula you are using to evaluate property can you post it in matmatical terms so I can test it? From your posts I'm not too sure how you are calculating your profit/loss.

[Iron Range]

This is a simple way I like to evaluate a property. Actual numbers are needed. 

Property is a duplex selling for $100,000
Total Rent is $1,500 a month(18,000yr)

1,500  gross monthly rent
   750  Net Income (usually around 50% of gross rent)

Mortgage on a 100,000 (purchase price) is $775

$25 a month negative. 

A mortgage pmt of $75,000 would be around $550. This would put the cash flow at around $100 a month per unit.  PERFECT!!!  Unless there are repairs, $75,000 is max I would pay for this property. 

Other facts are also critical in the decision making process. Things like utilities seperated or not seperated, condition of the building, area, etc. 

[LIGHTBEING]

Maybe your evaluations on duplexes is acceptable and that's a big maybe.  I wouldn't recommend.  However, we are talking about apartment buildings(Commercial)  I suggest investors to take every factor into consideration. 

Location
Desirability
# units
Square Feet
Cost per unit
Cost per Sq Ft
Price (incl costs)
Down Payment
Closing costs
Loan Amount
Gross Sched Inc.
Vac/loss2lease/conc
% Vacant
Expense/sq ft
Expense/unit
Expenses @
Capital Expenses
Net Operating Inc.
Inc After Capital
Dbt Srvc
Net Income ADS
GRM
Cap Rate  NOI/AP
Cash on Cash
Depreciation
Tax Savings
Appreciation yr
Percent appreciation
Debt Reduction yr
Total Return
Total % return

[Iron Range]

LIGHTBEING,

This will be the last post I respond to you. But here is some friendly advice. There are HUGE expenses and risks involved in commercial apartments and even residential property.  If you are unable to find great deals, then you should not be buying.  If you are unable to find deals that would cash flow at 100% financing, then you need to learn how to find better deals.  Not only should a property be able to cash flow at 100% financing, but it should also be able to pay $50-100 a unit profit per month.

Commercial is more difficult to find deals, and is why most of us focus on smaller properties that are better deals.  Focus on quality not quantity. You have demonstrated a clear lack of knowledge on how IMPORTANT buying only great deals really is.

It does NOT matter if there are not any good deals out there, what matters is that IF you buy, you don't over pay.  Buy or don't buy, just don't over pay.   

[LIGHTBEING]

There are HUGE expenses and risks involved in commercial apartments and even residential property.  If you are unable to find great deals, then you should not be buying.

I agree

If you are unable to find deals that would cash flow at 100% financing, then you need to learn how to find better deals.

It's not that I can't find deals that cashflow with 100% financing, it's that I choose to evaluate potential properties with true values.  If I'm leverage 80%, why in the world would I do a cashflow analysis using 100% ??

Not only should a property be able to cash flow at 100% financing, but it should also be able to pay $50-100 a unit profit per month.

I agree, I usually target 100+ per unit.

Commercial is more difficult to find deals, and is why most of us focus on smaller properties that are better deals.  Focus on quality not quantity.

OK, but this thread is specifically regarding commercial apartments.

You have demonstrated a clear lack of knowledge on how IMPORTANT buying only great deals really is.

You come to this conclusion because I include my debt service in my cashflow analysis?  That's rediculous.

It does NOT matter if there are not any good deals out there, what matters is that IF you buy, you don't over pay.  Buy or don't buy, just don't over pay.

I agree, never overpay for anything for that matter.



 

[Iron Range]

Some of your posts in this and other topics seemed to be saying that you can not cash flow a place if you get 100% financing. But I'm glad to read that you agree that 100% + $100 per unit/month is what is needed for a deal.  That is the important part.  The only difference between your way and my way is that you take out the down pmt in order to know what your return on invest is.  You want to know how much your making on the down pmt, and then use that to assess a property. That's fine, I don't have problem with that, just as long as you agree 100% + $100 per unit/month is not only doable, but required.

Your max purchase price should be very close to my max purchase price anyways.  The end results will be very close.