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Multi-Family and Return on Investment Example

Posted on May 14, 2014 at 12:10 AM

The subject of commercial real estate is not one I have posted on ... so, it is time to post something on commercial real estate.  Multi-family housing seems like a good starting point.  I picked a Chelan County posting where the purported cap rate is 8.0%, which is a bit generous (currently) for this type of investment.    I ran the numbers and made some assumptions about the expenses.  Was the asking price consistent with the 8% cap rate?? No, not even close.  A buyer buying into that would have seriously overpaid.

The following is a summary of a quick analysis done to test the purported number.; the price consistent with an 8% cap rate, based on my calculation and estimates, is shown below:


Multi-family Apartment Building Acquisition - Central Washington Appraisal, Economic & Forensics, LLC

www.cwa-appraisal.com (509) 679-3668


Project Name/Address:   Chelan  Cty Apt Example

Today's Date 5/13/2014 Value

Number of Units 3 Units Lot Size 0.40 Acres

Year Built 1982 Building SF 3,000 GSF

Acquisition Uses and Sources of Funds Going-in Cap Rate: 8.03% GRM: 4.84 Per Unit

Purchase Price $48 PSF /$145,148 /$48,383

Acquisition Costs 4.00% $5,806

Renovation Budget $10,000

Total Uses of Funds (Total Cost) $160,953

% Total Cost * Interest

Total Equity (includes Acquisition Costs) 40.00%  $67,865 Annual PMT

Mezzanine Loan Amount 0.00% 12.00% $0 $0

Senior Loan Amount 60.00% 6.00% $93,089 ($6,763)

Total Sources of Funds 100.00% $160,953 ($6,763)

* Loan Amounts calculated exclude Acquisition Costs

Months to Stabilization 6 months 11/13/2014

Hold Duration after Stabilization 72 months 11/13/2020

Total Hold Duration 78 months

Global Income Growth Rate: 2.0%

Global Expense Growth Rate: 1.0%

Income TTM Actuals Pro Forma Year 7

Gross Potential Rent (GPR) $30,000 increasing to $33,785

Gross Potential Income $30,000 increasing to $33,785

Plus Vacancy and Credit Loss - 8.90% ($2,670) ($3,007)

Effective Gross Income $27,330 $30,778

Less: Expenses (See Detail below) $14,400 48.0% GPR $15,286 45.2% GPR

Net Operating Income $12,930 43.1% Op. Mgn. $15,492 45.9% Op. Mgn.

Operating Cash Flow $6,167 $8,729

Cash On Cash Return 9.09% 12.86%

Real Estate Taxes $3,000 (estimate yr 1)   $3,185 (estimate yr 7)

Total Expenses $14,400 (estimate yr 1)  $15,286 (estimate yr 7)

Disposition Sale Date: 11/13/2020 

The asking price is $299K; the modelling suggests this cap rate is overstated, as is the price.

Ready to get a serious analysis? We can assist with storage facilities, hotels, lease v buy analysis.  Call us at (509) 679-3668



Categories: Commercial Real Estate - Finance

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