Mar 28 in General discussion
What Do You Think - Is This a Deal or NO Deal?
One of the things we do for our Mastermind members is analyze their apartment or hotel deal WITH them.
Last night, Wen (one of the coaches in my Mastermind) analyzed this deal from one of our Mastermind members:
168 units; Currently rented for $1,020/month on average It's in an area of the country where the cap rate is around 7%. The rents are under-market by $145/mo on average. We estimate the apartments need $10,000/unit in updates to command a higher rent.
They're asking $15.5M and they have an assumable mortgage of $12M with a 4.38% interest-only payment. This is what made the deal interesting.
It's a "C" property right now in a "B" area.
Is this a DEAL or NO DEAL?
Step 1: Calculate the proforma value of the property . We use a simple formula for our initial "back of the envelope" calculation.
{Proforma rent x 12 x 168 units x (1- expense ratio)}/ cap rate {$1165 x 12 x 168 x (1- 50%)/7% = $16,776,000
Step 2: Calculate the over-all profit
The mortgage payment is $12M x 4.38% interest only or $525,600/yr The proforma NOI is $1165 x 12 x 168 x (1- 50%) = $1,174,320/yr
This gives us a cashflow of $648,720/yr
To be conservative, we factor 4 years' worth of cashflow or $2,594,880 cashflow profit. The assumption here is we get minimal cashflow year 1 as we renovate the units and get them stabilized.
The profit from the re-sale is $16,776,000 less $15,500,000 (purchase) less $1,680,000 (rehab) or - $404,000.
So the profit will come only from the cashflow, for an overall profit of $2,190,880.
Step 3: Calculate the Returns
The investment needed is $3,500,000 ($15.5M less the $12M assumable mortgage) plus the $1,680,000 in renovation cost for a total of $5,180,000.
Our favorite metric is Equity Multiple which is calculated as:
(Profit + Investment)/ Investment = ($2,190,880 + $5,180,000)/$5,180,000 = 1.42x
The goal in every deal is at least a 2.5x equity multiple so this is a NO DEAL at the current asking price.
But what do you guys think? Is this a deal for you?
If not, at what price do you think this becomes a deal?
{NOTE: given that this is still a deal we're negotiating on, some of the details/photo have been changed}
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What Do You Think - Is This a Deal or NO Deal?
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