Beginner multi purchase questions ...

Jay Black

New Forum Member
Registered
Jun 24, 2018
9
0
1
39
#1
Hey everyone - I am in a position that I am starting to actively look for a multi unit building and had a few beginner questions.

A unit that I viewed is 2.8M ask and the cap rate is 5.1%. The NOI is 140K and I just found out that NOI doesn't include debt servicing costs (newbie here remember). A commercial mortgage looks to be about 4-4.5% with about 30% down. A 4% that comes out to be about $10.5K a month in payments.

So my question is how the heck can anyone buy this and make money? With debt servicing costs of 10K a month, that eats up basically ALL of your profits. You might be left with 20K at the end of the year - for your 800K investment.

How does this make any sense financially? Why would anyone buy this? Is there something I am missing? Is the be all and end all in the rent normalization or is this just a HORRIBLE deal? The city I am looking in has a few units in around the 5% cap so it seems that it isn't just a one off.

Thanks for any basic info you can give me!
 

Devin Roberts

Devin Roberts - Brent Roberts Realty
REIN Member
Nov 17, 2015
104
46
28
#2
Hey everyone - I am in a position that I am starting to actively look for a multi unit building and had a few beginner questions.

A unit that I viewed is 2.8M ask and the cap rate is 5.1%. The NOI is 140K and I just found out that NOI doesn't include debt servicing costs (newbie here remember). A commercial mortgage looks to be about 4-4.5% with about 30% down. A 4% that comes out to be about $10.5K a month in payments.

So my question is how the heck can anyone buy this and make money? With debt servicing costs of 10K a month, that eats up basically ALL of your profits. You might be left with 20K at the end of the year - for your 800K investment.

How does this make any sense financially? Why would anyone buy this? Is there something I am missing? Is the be all and end all in the rent normalization or is this just a HORRIBLE deal? The city I am looking in has a few units in around the 5% cap so it seems that it isn't just a one off.

Thanks for any basic info you can give me!
Lots of bigger players just pay cash or a higher down payment and then they have a lower debt service. Some also speculate on appreciation.


Devin Roberts — Brent Roberts Realty
Vancouver REIN Member
Cell: 604-354-7160
Email: Devin@DevinRoberts.ca
 

CorySperle

Senior Forum Member
REIN Member
Sep 1, 2010
716
459
63
Edmonton
#3
Your not missing anything, and to add insult to injury add in deferred maintenance, roof repairs, etc. not on the proforma and the inevitable turnover of 50% of your building when you take over, pay 10K to upgrade and rent each unit for less rent than before. There are many folks who are nodding as they read this.

Multi family is not the sure thing it was with values flat and falling with no short or long term upside on the horizon. Vendors are also delusional on values, but are under pressure these days as their ability to refinance/renew diminishes.

Buy under only two scenarios: The first, buying at a substantial discount where there is lots of value add, for example 30% vacancy and needs $200,000 of work but you can increase value by $500,000 or more short term to get a full stable building.

The second to find one that is already performing well with no deferred maintenance that you can take over and cash flow with a 75% mortgage. *spoiler* these sellers are not motivated.

The first case is like finding a needle in a haystack, the second a needle in a stack of needles. Good luck!
 
Likes: Jay Black

Jay Black

New Forum Member
Registered
Jun 24, 2018
9
0
1
39
#4
Hey Cory! Thanks for chiming in - I was hoping you would as I know you have extensive experience in this realm. This unit is in Kelowna to make matters worse. I have heard recently that the multi pricing here is way out of whack.

I will keep reading and learning and I have an agent or two with some feelers out, so maybe something will come along.

Thanks again :)
 

CorySperle

Senior Forum Member
REIN Member
Sep 1, 2010
716
459
63
Edmonton
#5
If Kelowna, then certainly read my other post about artificially high values determined by extremely low (temporary) vacancy and artificially high rents. Not to mention a government that is determined to pound all landlords into oblivion. Pass unless it's really cheap, but way too much speculation/housing laws in Kelowna right now.
 

Jay Black

New Forum Member
Registered
Jun 24, 2018
9
0
1
39
#6
Yeah tell me about it. It's pretty bad right now here. Both the city and province are hell bent on bringing down the investors.

Do you know the ballpark lending rates on commercial? My agent was saying 4.5-5% but curious what everyone else is actually getting?
 

Rickson9

Senior Forum Member
Registered
Oct 27, 2009
1,178
55
48
#7
How does this make any sense financially? Why would anyone buy this? Is there something I am missing?

You’re right. It doesn’t make sense. Seller is looking for someone they can take to the cleaners (or for someone get rid of a mistake that they made buying it)

In a way it’s obvious that the product makes no sense: cap rate is the implied return on an all-cash purchase so if it’s not all-cash, a 5 cap with lending rates around 5% wipes out the return

The only way this product makes sense is if there is an opportunity to turn it and raise rents, but that’s another story
 
Last edited:
Likes: Jay Black

Willyboy

Frequent Forum Member
Registered
Aug 19, 2016
112
30
28
#8
You’re right. It doesn’t make sense. Seller is looking for someone they can take to the cleaners (or for someone get rid of a mistake that they made buying it)

In a way it’s obvious that the product makes no sense: cap rate is the implied return on an all-cash purchase so if it’s not all-cash, a 5 cap with lending rates around 5% wipes out the return

The only way this product makes sense is if there is an opportunity to turn it and raise rents, but that’s another story
That's an important point Rickson. In your opinion how much should the minimal spread between lending rates and cap rates be like if the lending rate was 5% would 6%, 7% or 8% as a cap rate be enough or no?

I did some calculations myself and found out that for the investment to be worthwhile a 3% spread at least would be necessary. What do you think?
 
Likes: birdman

ThomasBeyer

Senior Forum Member
REIN Member
#9
You’re right. It doesn’t make sense. Seller is looking for someone they can take to the cleaners (or for someone get rid of a mistake that they made buying it)

In a way it’s obvious that the product makes no sense: cap rate is the implied return on an all-cash purchase so if it’s not all-cash, a 5 cap with lending rates around 5% wipes out the return

The only way this product makes sense is if there is an opportunity to turn it and raise rents, but that’s another story
That's an important point Rickson. In your opinion how much should the minimal spread between lending rates and cap rates be like if the lending rate was 5% would 6%, 7% or 8% as a cap rate be enough or no?

I did some calculations myself and found out that for the investment to be worthwhile a 3% spread at least would be necessary. What do you think?
Less than 1% in the real world, for large diversified job producing cities.

3% in fantasy land, or in remote risky locations.


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
 

CorySperle

Senior Forum Member
REIN Member
Sep 1, 2010
716
459
63
Edmonton
#10
Less than 1% in the real world, for large diversified job producing cities.
exactly why you need a REALLY GOOD reason to buy a building these days.. A sharp value add scenario is one of those reasons. The usual story, a standoff between vendors wanting previous years prices however cannot refinance vs. those looking for decent deals.
 
Likes: ThomasBeyer

Willyboy

Frequent Forum Member
Registered
Aug 19, 2016
112
30
28
#11
Less than 1% in the real world, for large diversified job producing cities.

3% in fantasy land, or in remote risky locations.


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
Less than 1% is the reality. Understood. but the question is will it be worth the investment in real estate then.

My calculations show with a low cap rate the ROI will be low as well so why bother and buy real estate? Wouldn't a well researched and managed stock portfolio be way better and less headache? all you would need is a computer and your investment is liquid and hassle free. And even if real estate will eventually yield a slightly higher return would it be worth your time and efforts for a slightly better ROI?

I personally find the stock market a better investment or at least as part of a diversified portfolio you can have both real estate and stocks.
 
Likes: CorySperle

adriano

Frequent Forum Member
REIN Member
Sep 25, 2007
177
47
28
55
#12
I agree with Cory that unless you can get a real good deal then why would you get into that for a projected 1%. All the buildings I have bought over the years have always had some sort of deferred maintainence that the realtor tries to tell me won't happen. Remember this is only a quick pay check for the realtor so they always want to try and get you to pay what the market was and not what it really is.
I have walked away from many deals for being too much and I have had them come back a year later and I got it for what actually made sense.
Proceed carefully. Good luck. I hope you find something that works you in the multifamily arena.
 
Likes: CorySperle

ThomasBeyer

Senior Forum Member
REIN Member
#13
I agree with Cory that unless you can get a real good deal then why would you get into that for a projected 1%. All the buildings I have bought over the years have always had some sort of deferred maintainence that the realtor tries to tell me won't happen. Remember this is only a quick pay check for the realtor so they always want to try and get you to pay what the market was and not what it really is.
I have walked away from many deals for being too much and I have had them come back a year later and I got it for what actually made sense.
Proceed carefully. Good luck. I hope you find something that works you in the multifamily arena.
Discussion on a fictitious (or real) $1M invested in an apartment, all cash or with 50% or 75% leverage. Makes sense almost always - in flat and of course, rising markets, which most are by at least inflation. http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

This was written assuming a 4% interest rate and a 6% CAP rate. Re-run with perhaps 3.5% interest rate and 5% cap rate to see similar, albeit slightly lower numbers.