2531 Grove Way — Investment Property Analysis

2531 Grove Way is a 10-unit apartment building that is located in a highly sought-after submarket and has no local rent ordinance controlling it. Comprising of 10 two-bedroom townhouse-style apartments, 2531 Grove Way has been renovated recently. It offers private, individual yards, fully upgraded condominium-quality interiors, private garages, and in-unit washers/dryers, ensuring premier rental experiences within a multifamily community.

While 2531 Grove Way offers all the luxuries of life that will entice many potential tenants to rent the individual units, it is important to analyze the property from an investment perspective. For this, we need to look at and perform a brief analysis of the numbers that show the long-term financial/investment feasibility of the property. Below are some key figures showing the long-term feasibility of 2531 Grove Way.

Analysis

From the numbers above, we can work out if there is long-term value in investing in the 2531 Grove Way apartment building.

Price Per Unit

The first number that we are going to look at is the price per unit. The price per unit, i.e., the sales price of an individual unit or apartment in 2531 Grove Way is $415,000.

Now, using the price per unit, you can compare 2531 Grove Way with other similar properties in the neighborhood, like the Castro Valley area. Ideally, the average price per unit of similar properties in the area should not be less than or equal to $415,000. If it is higher than this, then you will be most likely overpaying for the property.

NOI

The next number to look at is the Net Operating Income or NOI. The NOI is calculated by subtracting expenses incurred for 2531 Grove Way from the gross income earned from the property. Now, we have calculated the gross income by dividing the sales price of the apartment building (4,150,000) by the Gross Rent Multiplier (13.4). The Gross Rent Multiplier indicates how many years it would take to pay for the property using the gross rental income received.. The gross income calculated was $309,602.

. Since 2531 Grove Way is a newly renovated property, the only expenses we included were property taxes and private mortgage insurance (PMI)..

The expenses amounted to $80021. The NOI calculated was $229,681. NOI is an important number because, as the NOI goes up, the value of the property also increases. On the other hand, if the NOI goes down, the value of the property will also go down.

While the NOI in itself isn’t significant for property investment analysis purposes, it will help to calculate the cap rate for 2531 Grove Way, which in turn will allow us to determine the value of the property compared to other properties in the neighborhood.

Cap Rate

The cap rate is calculated by dividing the NOI by the sales price. The cap rate for 2531 Grove Way was 5.53%. Generally, a cap rate of 6% or lower is considered to be a low cap rate, which shows that the property is situated in a low-risk neighborhood. Therefore, investing in a property in the neighborhood carries very little risk. At a 5.53% cap rate, 2531 Grove Way is present in a very good neighborhood or a neighborhood with minimal risks for property investors.

Cash-on-Cash Return (COC)

The COC is calculated by dividing the cash flow by the down payment made for mortgaging the property.  The Cash-on-Cash Return calculated for 2531 Grove Way was 4% (33,693/830000).

Cash-on-Cash return shows your return on investment in the property in percentage. Getting a 4-percent return on investment means that you will get your money back (the down payment you made for 2531 Grove Way) in 25 years. Now, you need to decide if you are okay with waiting 25 years to get your investment back through cash flow.

Debt Coverage (DCR)

The next number that we will look at is the Debt Coverage (DCR). The DCR for 2531 Grove Way was calculated at 1.17. This was calculated by dividing the NOI by the annual mortgage payments (229,681/195,988.95).  The DCR is important to calculate because it is the first thing that your lender is going to look at when evaluating your application for commercial property financing.

Also, if the DCR drops lower to say 1.10 due to various factors, your lender will ask you to put down a larger down payment. Generally, a debt ratio of 1.4-1.5 or upward is said to be ideal and what property investors should be aiming/looking for.

Internal Rate of Return (IRR)

The IRR calculated for 2531 Grove Way was 0.114% or 11.4%. The gross return was calculated at 1.485% while the net cash flow was $12,325. This is based on an investment period of 25 years and a consistent cash flow of $33693. The initial investment (the down payment made) was also considered for the IRR.

An IRR of 11.4% means that you would earn $12,325 in net profits over twenty five years. While a higher IRR would have meant a higher return on investment, it would have also increased the risk of investment. So, if you are looking for a steady return on investment with minimum risk, then 2531 Grove Way is a good property investment for the long term.

Building Classification

Finally, 2531 Grove Way is classified as a C-class building. What does this mean? C-Class buildings generally refer to buildings that require upgrades and are built primarily for lower to middle-income tenants. As a C-class building, 2531 Grove Way is a good option for property investors looking for a steady rental income and cash flow. On the downside, the property may need renovation or repairs from time to time, which will add to your operating expenses, impacting your NOI, CAP rate, Cash-on-Cash Return, and DCR.