forgetting the comfort
the seller balked at the student’s
number was calculated by
levels and tastes of the dividing the NOI by the asking
elderly residents. What discounTing attempts and her requests price. Using the NOI figure
might seem dated to to adjust the return to a more
some people is perfectly
for financing. while she dithered and
realistic 10 percent means
acceptable and familiar
fretted, pondering her options,
that the property was worth
to those of an older approximately $250,000 more
generation, and that
someone else stepped in
than the asking figure.
shouldn’t be forgotten. Remember the point I made
and snapped up the deal.
earlier that the seller was asking
GW: What happened next?
little more than the assessed
SL: On the basis of this initial
taxable value of the property?
information, the student probably should have
That served as added confirmation that the property
gotten the property under contract pending financing.
was substantially undervalued.
Getting the property under contract with proper
clauses would have enabled her to control the
GW: With $35,000 in positive cash flow and $250,000
property while performing further due diligence.
of built-in equity, how could this deal possibly
have fallen through?
GW: What kind of story did the numbers tell you?
SL: Well, let’s start by giving credit where credit is due
SL: An excellent one. Even with a vacancy allowance
and pointing out all the moves the student made
factored in, which is always appropriate in a facility
correctly. First and foremost, she found the deal in
where maximum occupancy isn’t guaranteed, the
the first place. A lot of novices would have walked
figures indicated that the student would be left
right past something like this, but she saw the
with an annual net operating income (NOI) of
property for the good deal that it represented and
approximately $83,000. With a debt service went for it. She also did a decent job of putting
of approximately $48,000, that allowed for together an accurate financial analysis and then
approximately $35,000 a year in positive cash flow. topped it off by doing something truly amazing —
she obtained 90 percent bank financing.
GW: All while the property paid for itself and appreciated
in value year by year? GW: That’s very unusual in a market where 75 percent
SL: Yes, and this part of the story gets even better.
funding is the norm.
Taking the cap rate into account, the property SL: Exactly. Finally the student actually made an offer,
already had substantial equity built into it. which is a step that most novices find very difficult
to take. It was a pretty gutsy move given how little
GW: Could you explain a bit more about cap rates?
experience she brought to the table, especially
SL: Sure. Put simply, it translates to what a property
where a deal like this is concerned.
might really be worth based on the income derived
from it. The majority of investors would be happy
GW: Taking that first step into the market is always the
to earn double-digit returns on their investments, so
hardest for many people. So we’ve dealt with the
a figure of 10 percent would be perfectly acceptable.
positives. What about the negatives?
In this particular instance, the property had a cap SL: The fact of the matter is that an outrageously good
rate, or return, of approximately 15 percent. This deal was there for the taking, and despite all that
growingwealthmag.com I Growing Wealth I July 08 I 37
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