FEB 5, 2022
Before writing this, I thought about all the random bullshit I worked on from the ages of 21 till 25. In the moment, it didn’t seem like random BS, but looking back — it does seem trivial. For example, there was a period of a few years where I was convinced I wanted to be an Investment Banker; so I paid & studied for the CFA exam. I failed it three times (you can only take the exam twice a year).
Then there was the time I desperately wanted to get my MBA at an Ivy League. I spent thousands on GMAT & application prep. It amounted to jack-shit. I scored mediocrely. Around this time I couldn’t help but feel there was a disconnect between the ‘what’ I wanted and my ‘why?’ — Idk how to describe it, but I’ll try: You know you aspire for greatness, you feel it in your bones. So you work hard at everything you do. But what do you actually see yourself doing in 10-40 years? Now ask why that thing?
When I focus on the outcome vs. the ‘why’ it feels a lot like the cart before the horse — it’s backwards, I’ll fail, burnout, and have an existential crises. I have a lot of gratitude for my past self though, as should you. Chances are, if you’re reading this you also feel burnt out by all the in-cohesive work you’ve done in the past. We only connect the dots posthumously but that too becomes difficult if we can’t answer Why.
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Property in question: Asking - $375,000 - Units: 10 - Cap rate: ?
I came across this because a buddy told me about investing in Akron, OH of all places. I’ve done 0 research into Akron, but know it’s the same distance from NYC as Buffalo. I don’t invest in properties without feeling them and experiencing the neighborhood — the below analysis is purely for exercising my underwriting skills.
The property in question caught my eye because it’s a 2 building deal and one of them is completely boarded up because it caught fire recently! Not a good sign for vacancy rates, but a good sign of a deal priced to sell. I’ve never attempted to underwrite a deal like this, so I figured why not? Let’s take a look at the numbers.
At a price of $375k, and a LTV of 70% — I need $158,750 cash on hand ($112,500 + $35k + $11,250). Is this a good deal? Let’s keep going.
Based on the rent roll provided by the broker, total potential gross income is $83,172. That is, assuming both buildings were fully rented (lest we forget the fact that one building was on fire and is totally vacant). If all units were rented out, there’s a solid cashflow amount of $57,077/year on the property. That’s a cash-on-cash return of:
$57,077 / $158,750 = 36%. Nice? WRONG!
We forgot to include the mortgage payments to the bank — the bank always gets paid. When you plug in your 70% LTV mortgage into a simple mortgage payment calculator at a 4.5% interest rate (not bad, not great either), you get:
Now we have our monthly debt obligation at ~ $4,900/month, or $58,800/year.
Let’s plug that back into our earlier NOI: $57,077 - $58,800 = -$1,723!!! I’m not even going to bother calculating the cap rate since it’s going to be in the negative — what a shitty deal.
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“Are you fucking kidding me? I’m losing money on this deal with the assumption that it’s fully rented. Fuck off” is my initial reaction. Should you do the same? Maybe, maybe not.
The beauty of commercial real estate is that you can get creative now that you’ve done your due diligence. If you’re able to approach the seller with a strong case regarding how the numbers play out, and you’re both motivated for the transaction to go through — you can leverage other options to push the deal through, such as: Master Lease or Seller Financing.
Every deal stands on its own legs, and so every offer must stand on its own too. Happy hunting :)
