Counting to $15,000,000

Deal Analysis

OCT 10, 2021

Commercial Real Estate is a lot like the Wild West, minus the noon-high duels with revolvers and chewing tobacco (rarely anyone gets shot). There aren’t a lot of federal rules that dictate what buyers/sellers can’t do - you’re able to get super creative about deal analysis, funding, leasing, etc.

As long as all lawyers/popes bless the contract, you can continue with any holy matrimony of transactions.

It’s one of the reasons why I love CRE, there aren’t tight constraints (compared to residential homes) on newcomers, and if a deal makes sense for you and your investors: why not?

Below is a simple cash-on-cash analysis on a property I found on LoopNet. I’ll explain towards the end what CoC is, and why it’s relevant.

1 Ash Pl - Cutter Mill Ash Place (Great Neck, NY)

Asking: $15,000,000 - Units: 42 - Cap rate: 3.29%

Broker financials are always optimistic - this broker didn’t provide any details on rental amounts, or vacancy (red flag).

According to the listing broker - if you were to purchase this property today, your NOI would be close to half a million a year. This is mostly BS. Brokers are your friends, but they’re incentivized to transact - Calculate your own figures and due diligence to make a judgement call. See my quick analysis on this below, assuming the banks hate me and ask for 30% down.

Standard 3% & 2% estimate for Closing & Rehab

I need to put down $5,200,000 in cash for the bank to finance the rest of the purchase price - is this a good deal so far? Let’s keep going.

The last column is rents after I’ve adjusted the hypothetical previous rent roll - this is what I think can generate. $8000/year from laundry room, fees, etc.

So far, it seems like the current tenants are underpaying market rent by a total of $59,100 - at least according to me. This is somewhat a good sign, it means the property has some value add to incentivize the new owner.

Is this a good deal now? I’m not sure, so let’s keep going.

My NOI is coming in higher than what the broker thinks can happen optimistically - this is an eyebrow-raising figure.

Is this a good deal? I don’t think so. I’ve made dangerous assumptions about how much I would adjust rents, and the current vs. expected expenses. This, put together with the broker’s vague numbers doesn’t sit too well for me.

But let’s assume our numbers are correct! On paper this deal is great.

Where does the CoC analysis come in? A cash-on-cash analysis is a quickly calculated ratio to let investors know what the return of their initial downpayment is on a property. In other terms - how much cash am I making from the cash I’ve put in?

Initial equity required: $5,200,000.

Cash flow return: $535,975

Cash-on-Cash analysis: $535,975 / $5,200,000 = 10.3%

10.3% might be good, it might be great, or it may be trash - it depends entirely on your investment thesis.


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