21 units - Posted by Shane

Posted by Ian on September 29, 2004 at 16:54:09:


I know you posted this almost two weeks ago, but I found your deal interesting. Based on the numbers you provided, here’s my analysis and some suggestions:

Based on the in-place rents you provided here are the gross rent numbers I used in my calculations based on a 100%, 90%, and 85% occupancy rates, respectively:
$105,120 - 100% occupancy
$94,608 - 90% occupancy
$89,352 - 85% occupancy

From those gross rent numbers I subtracted the annual tax and insurance amounts you provided:
$99,718 - 100% occupancy
$89,206 - 90% occupancy
$83,950 - 85% occupancy

From that you need to subtract your expense numbers. Since I didn’t see that you had provided any I’ll take a straight 40% of gross rents, which some will think is conservative and others aggressive. This brings me to the following NOI figures:

$57,670 - 100%
$51,363 - 90%
$48,210 - 85%

Most lenders require at the very minimum a 1.25 debt-service coverage ratio (NOI/Annual debt service). Unless you can negotiate to change some of the terms of this deal you will not reach that ratio and I would advise against passing.

Based on my assumptions and calculations, you need to do one or some of the following in order to make this deal work:

  1. Negotiate with the lender to lower their interest rate
  2. Negotiate with the lender for either an interest-only loan, failing that, a 30-year amortization, failing that, a 25-year amortization
  3. Get the seller to lower the selling price

If you or anybody else disagrees with my analysis please, let me know. This was based on the analysis template that I use to analyze much larger deals and I’m not yet quite sure how it applies to smaller deals such as this one.

Hope this helps.

–Ian (Chicago)

21 units - Posted by Shane

Posted by Shane on September 13, 2004 at 20:18:39:

I am new to this sight and think it is very informing. I am trying to purchase 3, 7 unit appartments. 4 two bedrooms @ 460 and 3 1br @360. ins. 2627 and tax 2775. Actual rent was 99,180 for year. They were asking 275,000 each, I offerd 250,000, they have come down to 770,000 for all 3. All are brick, built in 1998. Is this a deal?

Re: 21 units - Posted by gwtx

Posted by gwtx on September 14, 2004 at 12:23:27:

Hi Shane,

Is this a deal?

Yes, it is if you are the seller.

No, it is not if you are the buyer.

Explanation (IMHO)

$35,028 = 1 bldg gross/year income
$17,514 = 50% Expenses,Mgmt,Vacancies / year (will depend on your area/building/mgmt
$17,514 = Net Operating Income (NOI)

Based on your $17,514 NOI
A lenders possible 1.4 debt coverage ratio
A possible 25 year loan @ 7.5%
The Maximum Loan supported by NOI is

That means if you pay $275k for each bldg. you will have to come to close w/ approx. $134k plus or minus a few k.

If you do get the loan for 141k for each bldg. you will have a break even ratio of 85.71%. That means you will have to keep your units rented up at 85%, or, you will be losing money.

These numbers are income based only. The buildings are more than likely worth more when appraised from a replacement value since they were built in '99 and they are brick.

This is just a snapshot of this property before you perform the due diligence. (IMHO)

Hope this Helps

Re: 21 units - Posted by Shane

Posted by Shane on September 14, 2004 at 12:58:04:

They have come down to 256,000. The loan would be 6.15% fixed for 5 yr. amor. over 20yr. I will manage the property my self. I also have a commecial cleaning company. I told them I would only give 250,000 per building. Would that have the cash flow to be feasible.

Re: 21 units - Posted by Mike

Posted by Mike on September 14, 2004 at 20:22:31:

Run the numbers and find out! All the info you need on how to do cap-rates, NOI, DSCR, etc. Are on this wonderful website and others. The math behind them is mostly simple ratios. Get the info, create a spread sheet (or get one from someone here), and give it a go.

You’ll be much better off knowing how to do this yourself for future deals.

Re: 21 units - Posted by Shane

Posted by Shane on September 14, 2004 at 20:50:40: