Analyzing a 70-Unit Apartment

This property creates a good first impression. Multiple 2-story buildings are in good shape and sit in a nicely-landscaped campus. The four- and six-plexes are built like town homes, with each unit having a main floor and an upstairs. There are 12 two bedroom units, each 850 square feet, and 58 three bedroom apartments, each 1050 square feet. Uncovered parking is plentiful in the parking lots.

The property is listed at $3.7 million. The current loan is assumable, meaning the lender is already comfortable with the project and how it is performing. It’s an adjustable loan, so the interest rate and monthly payment can change. As of January 1, 2009, the interest rate was 6.125% and the payment was $17,974.72 per month. We’ll have to see if that makes sense for us, or if it would be better to bring in a new loan.

One of the major difficulties in analyzing a deal is a lack of needed information the seller gives us. However, we start with the numbers we do get and run a quick set of calculations to see if it’s even in the ballpark. If it’s not, we move on. If it is close to what we need, we’ll do a second round of analysis with more detail.

The first quick-check we did takes the offered list price, the current income and the current expenses. For our purposes at this time, we assume the seller’s figures are accurate. We’ll check them thoroughly during our due diligence process if we get a signed contract.

For this apartment, the gross income for 2008 was $448,230. The total expenses were $184,013, or about 41% of the income. This is on the low side of what we’d expect unless the tenants are paying a large part of their utility bills. Subtracting the expenses from the income leaves us with the Net Operating Income (NOI), a key figure in our analysis. Here the NOI is $264,217.

Taking the NOI divided by the sales price gives us the Cap Rate. So for this example, we divide 264,217 by 3,700,000 and get about .07 or 7%. This number represents the return the property is getting, assuming it is owned free and clear. Another way to think of the cap rate is to compare it to a savings account. The cap rate would be the interest rate you are getting. So in this case, if you had $3.7 million in the bank earning 7% interest, your yearly income would be around $264,000, the same as the NOI.

After this quick calculation we can tell if the deal is close enough to examine further. Since we’d like to buy at a cap rate of at least 8 for a property in this condition, a cap rate of 7 is close enough to go to the next step.

Once the quick once-over has persuaded us to take a deeper look, we insert the detailed information the seller has given us for the income and expenses into our software.

The first time we ran the numbers we used the listing price and the assumable loan figures. We found the cap rate was too low and the cash-on-cash return was pitiful.

The second scenario dropped the purchase price to $3.4 million and included a new loan at a 70% loan to value (LTV). This means we would come in with a 30% down payment. Again, the results were not encouraging.

Next, we went in with what sounded good to us. With a $3 million offer, a $250K note to the seller at 7%, and a 1st loan at 6% interest and 30% down, the cap rate went to 8.9%, and the cash-on-cash return was at 9.6%. Definitely moving in the right direction.

The next step is to check with a mortgage broker to se if he has lenders who will accept a seller carry-back note, and what current terms are for a property like this.


I just talked with the broker in Denver. No lenders are allowing seller seconds, but they do have very attractive terms. They are offering an 80% LTV loan at 6% for 5 years, amortized for 30 years. That get the mortgage payments quite low, which puts the cash-on-cash return at 11.8%. The cap rate stays at 8.9%. 

If we can get this offer accepted, investors will be begging for a piece of the action.

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