Here is a new property that I am looking at. The properties are a bunch of 2br 2ba condos out that are clustered in 4 unit buildings. The condo complex has about 16-20 of these 4 unit buildings. The condos are in a nice area which has some appreciation potential. What is for sale are a package of four, 4 unit buildings, or 16 total condos. The 16 condos part of an estate sale. I can look at this in many ways, 16 individual condos, 4 – 4 plexes, or a 16 unit multi. I tend to always break things down into individual units. I’m not sure if that’s correct or not, but I always like to figure per unit costs then multiply them out.
They are listed as a 16 unit property for about $1.2M. This comes out to $75k per condo which is about market price for them.
Is this a good deal? Below are the numbers for just one condo at $75k.
- The rent averages around $615, but can be raised to $675 (where have I heard that before?)
- HOA is $80/mo
- Taxes are $60/mo
- Insurance is $10/mo
- Property management $50/mo
Net operating income is ($615 – $80 – $60 – $10 – $50) $415/mo or $4,980/yr
Cap Rate is $4,980/$75,000 = 6.6%
Considering that I would be borrowing money above 6.6% interest rate, this is not a good deal at asking price. However, I believe that there is room to move because a seller selling 16 condos at the same time is probably expecting the buying to want a significant discount. So, let’s say that best case scenario is $60k/unit but $67.5k is probably more realistic.
A quick call to a mortgage broker and I’ve found that I can get one loan per four condos, which is good since I’ll save on some closing costs. I really just wanted to get a sense of my loan rate and it looks like somewhere in the high 7’s or low 8’s. If I assume that I will be doing a 80% loan that has a rate of 8% with P&I, my payment per condo would be $396/mo.
Cashflow per condo is only $20/mo. Cash on cash return is $240/$13,500 = 1.7%. Boy does that suck!! My problem is that my cap rate is still below my loan rate. Why am I even looking at this property?
Let’s look at the potential. If what the sellers are saying is true and that rents can be increased to $675/mo, I can slowly go in and raise the rents and increase each unit to $95/mo cashflow. Cash on cash becomes 8.4%. Yeah, still sucks. As you can see through this exercise that the only way to really make money by buying at $67,500 is to hope for appreciation. The cashflow is not worth it. I can get better returns loaning out hard money.
What is interesting is that the condos I purchased in 2004 had very similar numbers and yet I found them as a good deal. Why? It’s because the interest rates were so low at the time. If I can get a 6% interest rate on these condos, what would the numbers look like? 8.1% cash on cash return without even raising rents! 13.5% if I raised rents.
I have always wondered if the potential of refinancing to lower rates in the near future should be included in the evaluation of a property. If I thought that rates would drop to 7% next year… does that enter into my decision making process at all?
The only way I can see this working is if I bought at below $60,000/per unit AND got a lower rate than 8%.
Don’t you hate it when you do all the calculations and the deal sucks!