Deal Deep Dive

I recently closed on a small multifamily apartment complex, and I want to walk through the math behind the deal. The property had 12 units, with an average in-place rent of $1,200 per month. The cap rate we paid was 6.5%, which put the purchase price at $1.35 million. Now, here's where it gets interesting - the pro-forma rents, based on comparable properties in the area, were $1,500 per mnth. This discrepancy told me there was a clear value-add oportunity. The curent owner had not raised rents in over three years, and the property was still using an outdated lease structuer. By modernizing the leases and bringing rents up to market rate, I project an additional $36,000 in annual revenue. The value-add plan also includes renovations to the common areeas, new appliances in each unit, and a fresh coat of paint throughout. These upgrades will cost around $150,000 but are expected to increase the average rent by 15% and reduce vacancy rates. To calculate the potential return on investment, I used the following numbers: purchase price ($1.35 million), total renovation costs ($150,000), and projected annual cash flow ($105,000). With a 20% down payment, the mortgage will be $1.08 million, and the debt service will be around $65,000 per year. After factoring in operating expenses, property management fees, and maintenance reserves, the net operating inome (NOI) comes out to $75,000. Using the cap rate formula (NOI / Purchase Price), the projected cap rate after renovations is 7.4%. Based on these numbers, the potential resale value of the property would be $1.65 million, representing a 22% increase in value over the initial purchase price. Overall, I believe the combination of a solid location, in-place cash flow, and a well-executed value-add plan make this a compelling investment opportunity with strong potential for long-term appreciation and cash flow.