Posted by youngsterz on March 20, 2002 at 22:39:33:
My two bits. . . .
Cap rate: It’s a factor of local conditions & norms, and ultimately it only matters what you are willing to personally accept in your deals. Up to you.
Loan: You should be able to find a 90% loan on a 3-unit for 8% or better. Some variability may be had on point buy-downs, etc, but there are definitely 90% programs out there. One thought: See if the buyer will carry 15% at 30 yr amortization, but with a 3 yr balloon. 30 yr amort will lower your monthly payments and increase cash flow. Do an 80% first and avoid the PMI (increase cash flow), then refinance in 3 yrs. Between upgrades, rent increases, captured equity, appreciation or other financial tweakings, you may be able to cover it all with a new 80% loan in 3 years at the increased appraised value, not the purchase price. Crunch the numbers. Heck, increase the purchase price and have the seller carry 20%, for nothing down out of pocket (minus loan costs). That would certainly help your return on your down payment!
Final thought: 35% for vacancy, maintenance, etc. may be a little stiff. It’s good for conservatively evaluating, but if you manage the property right, and it’s in good condition right now, you should be able to keep that percentage under control, and increase your monthly cash net. I’m just saying to confirm your assumptions, and break it down in a little greater detail. You also should evaluate the potential to increase rents, even $10 or $20 per unit. That would really give you more margin for error, in addition to increasing the property value from an income valuation approach.
From the looks of it, this has nice potential for a nothing down deal, to put in the keeper portfolio for awhile, if that is your intent.