Posted by nate on February 02, 2001 at 15:52:35:
You need to get a handle on what the REAL operating expenses are. It wouldn’t surprise me if it were 40% of gross income. Then again, it might be a lot lower. Read Ray’s articles on doing due diligence to get an idea of what to look for.
At the stated rents and a 5% vacancy factor, the gross income of the portfolio is $58,311 per year.
At a sale price of $330,000…
With expenses at 30% of EGI, your cap rate is 12.36%.
With expenses at 40% of EGI, your cap rate would be 10.6%.
With expenses at 50% of EGI, your cap rate is only 8.8%.
So, what you need to do is get enough information to determine what you believe the likely expenses to be, and how certain you are of it. Then, figure out if under that scenario, the deal meets your needs or not.
Frankly, for this type of portfolio (scattered site, small 1-4 unit properties), I personally would be going in looking for better than a 12.36% cap rate. This is a management intensive portfolio. But that’s just me. Your requirements may vary.