Simulation: a fictional property for practice.

A 12-unit apartment building: will the lender agree?

Twelve units at $1,500,000. The seller’s expenses look low. Rebuild the numbers and see what a lender will lend.

A fictional 12-unit apartment building bought with a commercial loan. Rent and property tax rules depend on the state and city.

• Price: $1,500,000
• Rents: 12 units at $1,350 a month
• Seller’s expenses: 30% of collected rent
• Loan you hoped for: 70% of the price, $1,050,000, at 7% over 25 years: about $89,000 a year

Mission 1: Are the expenses real?

The seller’s expenses are 30% of collected rent. What do you check?

• The property tax after the sale, from the county: it can rise when a building sells
• A fresh insurance quote for the building
• Whether the seller manages it for free and left out management and repairs
• Nothing: the seller’s numbers come from their tax return

Rebuilt with realistic taxes, insurance, management and repairs, expenses come to about 45% of collected rent.

Mission 2: The numbers, rebuilt

• Rent if fully rented: $194,400 a year
• Vacancy and unpaid rent (assumed 7%): −$13,608
• Operating expenses (about 45% of collected rent): −$81,356
• Net operating income (NOI): About $99,400
• Reserves for big replacements (assumed $300 a unit): −$3,600
• Debt service on a $1,050,000 loan: −$89,054
• Cash flow: About $6,800 a year
• Loan coverage (DSCR): NOI ÷ debt service: About 1.12

With the seller’s 30% expenses, DSCR would look like 1.42. With realistic expenses it’s 1.12.

Mission 3: What will the lender do?

The lender requires a DSCR of at least 1.25. What happens?

• The loan shrinks to about $938,000, so I need about $112,000 more cash
• The lender ignores DSCR if my credit is good

Many commercial loans also end with a balloon payment before they’re paid off. Know the term, any prepayment penalty, and whether you’re personally liable.

At $1,500,000, what do you do?

Buy, investigate or pass? Work through the drill to see what an experienced investor would weigh.