Apr 11 in General discussion
Deal or No Deal
(when you see *this...usually it's a good deal)
This deal was brought to me by one of my Mastermind members. It's still a "live" deal so I changed some of the details (and the photo too). But the "essence" of the deal remains the same:
- 40 units; rents are under market by $300/mo (current average rent/unit is only $600/mo/u)
* When I heard the rent to be $300/mo/u, that's an indication that there is a deal here. Apparently the landlord did not increase the rent for several years now.
- "C" property (based on this, the operating expense ratio is 50%)
- Asking price: $1.8M- the location cap rate right now is below 9% but to be conservative let's use 9%
- lastly, the units need about $5K/u in updates for total capex of $200K
Step 1: Calculate the Proforma Value
1.1 Proforma NOI = $900/mo/u x 40 u x 12 mos x (1- 50%) = $216,000
1.2 Proforma Value = $216,000/ 9% = $2.4M
Step 2: Calculate the Over-all Profit
2.1 Profit from the Sale: $2.4M - $1.8M (purchase) - $0.2M in capex = $400,000
2.2 Profit from the cashflow
- let's assume for now (for simple math), we're paying 7% interest only at 75% LTV
- loan amount: ($1.8M+$0.2M) x 75% LTV = $1.5MCashflow = NOI
- debt service= $216,000 - $1.5M x 7%= $111,000
To be conservative, we only consider 4 years worth of cashflow. To be exact, one needs to do a proforma projection over a 5-yr period.
Profit from Cashflow = $444,000
Total Profit = $844,000
Step 3: Calculate the Returns
My favorite metric is Equity Multiple, which is calculated as follows:
EM = (Profit + Investment)/Investment
The Investment = 25% x ($1.8M + $0.2M) = $500,000
EM = ($844K + $500K)/$500K= 2.69x
Our minimum to proceed is 2.5x. However, given the location and unit count, we should strive for a 3x EM.
Regardless, it's a deal worth making an offer on.
What do you think?
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Deal or No Deal
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