Using CAPS to evaluate Apartments

is the most effective way to evaluate the rate of return on a larger investment property. The problem with using it for a small property (like this one) is the fluctuation of the vacancy rate. It hard to know what is included in the "misc expenses". Smaller number of units equals a larger vacancy rate. It is too hard to normalize the vacancy rate and thereby the cap rate is skewed. Also, when using cap rate in a perfect world, you also want to calculate income based upon 100% fulfillment and then subtract various vacancy rate depending on economic scenarios.

asking price ? Maybe you could call up a commercial broker, and get their opinion, because technically anything over 4 units are considered a commercial property. They could try to get comps for you as well.

That being said, IF you were to use the Cap formula on a normal commercial apt. deal, it would look like this: (NOI / Price = ROI or Cap rate).

Find out the breakdown of expenses. The occupancy rate is a major factor.

By the above number if you offer 189,000 it will be a 10%cap.
Because the NOI is 18900. (subtract expenses from annual income)
But still find out the expenses, annual income, & your vacancy. Mortgage payment will be good to know but that would change as the buyer will get a different loan and terms.

Thank you guys for your solid advise, and I will get assistance from commercial brokers. The vacany rate is practically zero, one vacancy in past 2 years and it was filled within 2 weeks. The misc expenses consist of building maint & repairs $1200/yr. and parking lot/yard maintenance $600/yr.

If you were interested in this property, how would you approach it? Just basic suggestions are what Im looking for, so Im sure I consider all options.

Thanks again.

Will the owner finance or L/O?

Since its 5 unit qualifies for commercial loans, that are not based on your credit,but on the property.

Important: if you get this property,Close on the 3rd of the month,you'll collect prorated rents for 27 days + deposits that will go in your pocket. Try and get your 1st payment 60 days out= 2months collected rents + above pro rated rents+ deposits=fat pocket.

Nuggets galore. Ill PM you.

Steve just stopped to see how your doing. I never got involved with holding properties yet so I don't comment on these questions,I leave it to the ones that do.

Mr. Jim thank you for checking on me. I really need a bunch of people doing that in order to keep me between the lines. Yea, Im with you on holding properties, but this one is close, in a great area with solid vacancy rate. Ill just have to do my due deli, and see what kind of deal I can work out with the owner. I will keep you updated. Btw, the little 2/2 rehab I was looking at got away. I just didnt move quick enough, but I will get faster. Just got to remember to take my gout meds and keep all the moving parts greased.

Take care buddy and have a $$$ day.

Steve,

I ran the scenario with the numbers you provided and here is what I found.

Your Information.
Asking Price $205K
Annual Gross Rental Income $25,200
Property Taxes $2,300
Insurance $2,200
MISC $1,800
Mortgage Expense $12,960 (with sellers asking price the loan is 15% Down, 6.313% Interest rate, 30 Year amortization)

With Sellers asking price, 0% Vacancy and supplied information only :
Monthly Cash flow is $494.96
Cap Rate is 9.22%
ROI based on a down payment of $30,750 is 19.32%

There is a book that I highly suggest you read, actually a couple by the same author Ken McElroy. You need to read the following:

"The ABC's of Real Estate Investing"
"The advanced guide to real Estate Investing"
"The ABC's of Property Management"

Here is the link for amazon.com
http://www.amazon.com/s/ref=nb_sb_ss_i_1_11?url=search-alias%3Dstripbook...

Ken is all about managing huge apartment complexes and teaches you a lot about how to run every individual unit as its own business, whether its one single family home or 100 apartments in one building they all have common principals.

In a nutshell this 5 plex needs to have a lower purchase price if your buyer is going to finance the deal to have better cash flow, but there are cash buyers out there that would love a cap rate of 9% it gives the property a value of about $204K. The Seller is trying to sell it at its Full Market Value based on the Cap Rate. But this cap rate value is inflated by the seller.

Comps on a commercial property are not determined by previous selling prices, it is done primarily on cash flow without including Debt Service.

There will be more costs than what the seller has supplied you with, Vacancy, Attorney Fee's, City Rental License, Marketing for Tenants, would your buyer have a Manager or Manage it themselves? Are all of the utilities paid by the tenants or does the owner pay some? There is a lot more to the Buy and Hold strategy that you'll become more aware of.

A good deal is typically found by running the numbers per unit. Essentially all you need to do is use the following formula:

Monthly Rent
- Taxes
-Insurance
-Mortgage Payment
-10% Property Management
= $200 Monthly Cash flow

Whatever the Numbers are for those above expenses just keep lowering the buy price until you get to at least $200 Month Cash Flow. There are additional expenses beyond those listed but thats why you shoot for cash flow of $200, it will help to absorb those unlisted.

The above formula also assumes that the tenants pay all utilities!

Shoot me a PM if you have any Questions. Again I highly suggest you read those books, they are very detailed in Cap Rate and other figures.

Lower the Price or get Great Terms.

Maybe the Seller can hold a note with amazing terms like 90 days until first payment, 4% interest with $10K down or 6% interest with a $0 Down Payment. You won't know unless you ask!

Another way to make some money on the deal is to Manage it for him.

Maybe you could manage the property for him for 10% of annual collected rent.
In Iowa a person can manage a rental property(s) for one owner without a license. If I manage properties for 2 or more I need to have a Real Estate License or Brokers License to do so, be sure to check your local laws.

When talking to an Agent ask the right kind of questions.

"Whats the current average on the Cap Rate, Market Value, and Fair Market Rent for 2Bed/1Bath Apartments in Such and Such Area?"

Also ask them if they could recommend a bank to talk to that handles loans on commercial properties. Do they have an Insurance Agent that they Could Recommend?

An Agent that can give you a fast confident answer for the Cap, Value, and rent is someone who is in the Game. You Could also go to any Brokers office on Monday at 9AM (or earlier if the doors are unlocked) and talk to the Agents who are there. If they are on time they are in the game!

I have gotten some great advise on this possible deal, and yours is right up there. Thanks so much for taking the time and I wil keep you updated. The first is always the tuffest, but here we go!! Thanks again

And when dealing with 5 units loans sometimes are harder to get and you or your investor wont be able to get a non recourse loan.

Theres alot to it for apartment investing but the profits are much higher and once you learn it gets easier.

And its basically the same amount of work for SFR with less competion

dropping by and leaving your comment. I have gotten good advise and at this point, I need all I can get. Havent decided which way we are gonna go, but am hoping the present owner will wont to stay involved. I will let all knows how this ends.