Apr 4 in General discussion
Is This a Deal? 400 Units!
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:
- 400 units; rents are under market by $200/mo (current average rent/unit: $1,000/mo/u)
- Property was built in 2015 but somehow their operating expenses are 55% of the collected revenue; based on experience, the operating expenses should be 40% for an apartment complex of this age
- Asking price: $25M- the location cap rate right now is 7% but to be conservative, we're using an 8% exit cap rate
- lastly, the units need about $10K/u in updates'
Step 1: Calculate the Proforma Value
1.1 Proforma NOI = $1200/mo/u x 400 u x 12 mos x (1- 40%) = $3,456,000
1.2 Proforma Value = $3,456,000/ 8% = $43.2M
Step 2: Calculate the Over-all Profit
2.1 Profit from the Sale: $43.2M - $25M (purchase) - $4M in capex = $14,200,000
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: ($25M+$4M) x 75% LTV = $21,750,000
Cashflow = NOI - debt service= $3,456,000 - $21,750,000 x 7%= $1,933,500
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 = $7,734,000.
Total Profit = $21,934,000
Step 3: Calculate the Returns
My favorite metric is Equity Multiple, which is calculated as follows:
EM = (Profit + Investment)/Investment
The Investment = 25% x ($25M + $9M) = $7,250,000
EM = ($21.934M + $7.25M)/$7.25M= 4.02x
Our minimum to proceed is 2.5x. This is a whopping 4x
So it's definitely worth looking into and making an offer on.
What do you think?
Information presented is for educational purposes only and is not intended as, or may not be relied upon as tax, legal, investment or real estate advice. Consult your tax, legal, investment or real estate professional before investing. Information presented is not an offering.
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Is This a Deal? 400 Units!
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