You are correct that financed deals need more scrutiny than cash deal.
Generally, they offer more opportunity for gains if evaluated properly.
The best rule I have found is:
"Be cash-flow positive from day 1!"
As you said this is not the case here.
A few things anybody considering a deal like this also needs to consider that is not shown in the calculations presented:
• The property needs management - a property of this size should be calculated with about 8% of rent income in management fees
• The property will require maintenance and repairs - 5% of rent should be calculated
• The property will need CAPEX, not in the first 5-8 years but at some point, latest hitting 10 years, so 5% of rent income should calculated to accumulate sufficient funds for CAPEX, things like new roof, new air conditioning, new water heater, new floors ...
• The property is probably not always fully occupied, so you want to calculate 3-5% of rent for vacancy periods as the payments to the loan have to happen regardless of occupancy
This means 20%-25% of rent should be set aside for all these needs.
A good deal is found when you still have at least $1 or UBX1 positive cash flow after loan cost, taxes, plus the items listed above have been included in the calculation.
I just wanted to point out that the interest rate makes this prohibitive, but when taking all the due diligence into consideration, it is even less desirable.
Inflation is a big aspect too that I did not want to mention, but it could be potentially helpful if it is common that wages increase in line with inflation.
You put 2%-3% for rent increases but it should be 2% - 3% + inflation.
In a high inflation scenario the erosion of purchasing power of the money will help in a deal like this because your rental income would increase quickly while your loan remains stable for 10 years.
Indeed, the interest rates at 18% is not prohibitive just, it's just too expensive for anyone or business to breakeven even before you consider other costs raised above.
Thank you Alex for this piece of information. I have also factored in the vacancy rate. Normally, when the project is complete, it doesn't attract a 100% occupancy on its launch. The rate gradually increases as the place gets known and attracts potential tenants.
You are correct that financed deals need more scrutiny than cash deal.
Generally, they offer more opportunity for gains if evaluated properly.
The best rule I have found is:
"Be cash-flow positive from day 1!"
As you said this is not the case here.
A few things anybody considering a deal like this also needs to consider that is not shown in the calculations presented:
• The property needs management - a property of this size should be calculated with about 8% of rent income in management fees
• The property will require maintenance and repairs - 5% of rent should be calculated
• The property will need CAPEX, not in the first 5-8 years but at some point, latest hitting 10 years, so 5% of rent income should calculated to accumulate sufficient funds for CAPEX, things like new roof, new air conditioning, new water heater, new floors ...
• The property is probably not always fully occupied, so you want to calculate 3-5% of rent for vacancy periods as the payments to the loan have to happen regardless of occupancy
This means 20%-25% of rent should be set aside for all these needs.
A good deal is found when you still have at least $1 or UBX1 positive cash flow after loan cost, taxes, plus the items listed above have been included in the calculation.
Otherwise I would stay away.
This more elaborate in the few other things to consider for such a big project. Thank you Dr Axel.
You are welcome Kakande
I just wanted to point out that the interest rate makes this prohibitive, but when taking all the due diligence into consideration, it is even less desirable.
Inflation is a big aspect too that I did not want to mention, but it could be potentially helpful if it is common that wages increase in line with inflation.
You put 2%-3% for rent increases but it should be 2% - 3% + inflation.
In a high inflation scenario the erosion of purchasing power of the money will help in a deal like this because your rental income would increase quickly while your loan remains stable for 10 years.
Indeed, the interest rates at 18% is not prohibitive just, it's just too expensive for anyone or business to breakeven even before you consider other costs raised above.
Yes, that is true.
on the other hand, if the economic and financial circumstances were better interest rates would be lower, so there is a connection
Thank you Alex for this piece of information. I have also factored in the vacancy rate. Normally, when the project is complete, it doesn't attract a 100% occupancy on its launch. The rate gradually increases as the place gets known and attracts potential tenants.
Thank you so much for the insight am your regular follower.
Thank you Patrick.