Let’s make a deal… or let’s not

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!

About Kenric

My blog about living life to the fullest by generating passive income through real estate, business and online investments.
This entry was posted in Real Estate. Bookmark the permalink.