Hello everyone. This is Juan Carlos Gastelum. I am a real estate investor in Texas. Today we’re going to analyze an on-market deal that was brought to us by a real estate broker. It’s on the MLS and the asking price is $3 Million. The property is a 10 unit building located in an average rent-to-price market of 0.30%. It has one efficiency, three 2-bedrooms/1-bath and six 1- bedroom/1-bath. So let’s start with that analysis. We’ll begin with the asking price scenario; the current asking price is $3 Million and the market value we assessed consists of a 4% cap rate on an NOI (Net Operating Income) of $119,640. This NOI of $119,640 at a 4% cap rate would give us a market value of $2,991,000. We have assessed the bare land value at $300,000. We are assuming closing costs for this transaction at $50,000 and a loan to value of 80%. According to the broker´s numbers the property is generating monthly rental income for $15,500, plus an additional monthly income of $225 from on-site laundry and a $100 sprinkler fee charged to neighboring properties. So the total amount of monthly income adds up to $15,825.
We’re assuming a discount for vacancy and bad debt of 3%, maintenance and repairs of 5%, and a property management fee of 8%. Property taxes for 2020 on this property were assessed at $11,577. Seller is currently paying a yearly insurance premium of $11,340. Other expenses reported, including water, electricity, gas, lawn, and pest control are at $760. We are underwriting at a 30 year amortization with a 4% interest rate. We are also assuming a yearly appreciation of 3%.
The result: these numbers turn a negative CoCROI (cash-on-cash return on investment) at -0.14% and an IRR (internal rate of return) on year seven at around 11%. So given these numbers, we definitely cannot take this deal to investors or a lender; it just doesn´t pencil out. Of course, reducing the purchase price sweetens the deal and if the market values the property at $2,991,000, seller would have to come down at around $2.4 Million. At this price level and with the current income, the property would yield a CoCROI of 6.94%. This price level also takes our cap rate to 5.73% which is higher than what the market is telling us investors are willing to risk (the lower the cap rate the more comfortable investors feel about a market) and the IRR calculation increases to 22% on year seven. At a $2.4 Million purchase price the deal would be very attractive for investors, having cash-flow plus appreciation. So we think that the correct offer for this property is $2.4 Million.
The property is a charming, beautiful three story 10 unit older building; the kind you immediately are drawn to. However, because the seller is asking $3 Million and our offering base price is at $2.4 Million, the best alternative is to propose a creative financing structure with the seller. So we may end up offering some kind of seller finance option or a master lease option for this property. We’ll see what the seller has to say. If we do get it under contract we’ll certainly write about it. That’s it for now. Take care. Best wishes on your real estate journey and God bless!
