[Inovestive]

[SAMPLE] Fictional preview material. This discussion was written by the site administrator to preview the Community design. Names, numbers and scenarios are hypothetical. It is not advice and not a real member post.

Hypothetical 12-unit building, asking $1,250,000. Before making an offer, this is the review list I would run. What am I missing?

• Trailing 12-month income and expenses, checked against bank statements, plus a current rent roll
• Leases and tenant estoppels; lease dates, deposits and any concessions
• Physical inspection, including a sewer line scope, roofs, HVAC, plumbing materials and electrical panels
• Utilities, who pays them, and whether charges are billed back
• Property tax reassessment risk, an insurance quote, and zoning or code issues
• Loan terms, required reserves and the debt service coverage ratio (DSCR)

Illustrative numbers: 12 units at an average $1,050 rent is $151,200 gross potential rent. With 7% vacancy and about $6,000 other income, effective income is about $146,600. At a 45% expense ratio, net operating income is about $80,600, a 6.5% cap rate. With 70% financing ($875,000) at 6.75%, annual debt service is about $68,100, a DSCR of roughly 1.18, below the 1.20 to 1.25 many lenders ask for.

What would you adjust to make this deal financeable, and what would make you walk?

[Inovestive]

[SAMPLE REPLY – fictional preview, written by the administrator] That DSCR gap is the real lesson in the example. Options include a lower price, a larger down payment, or documented rent upside, but I would not underwrite future rent increases the seller is only promising. I would also budget deferred maintenance explicitly. A building that looks like a 6.5% cap rate can behave like a 5% one after the first year of repairs.

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