Block of 12 flats. 4.5 mill. Capital growth p.a. 5%

Hi crew.

Hope you're good. Any thoughts on the following? Feel free to throw some numbers at me.

If i'm looking at a block of flats in Melbourne. 12 doors. Mix of 1,2,3 brm. Income after expenses is $50,000 p.a. Price of block/asset is $4.5 million. Bank loan = $ 3 million. Private equity/JV partner input = $1.5 mill. Capital growth of this amenity/services consistently strong location, street/suburb is around 5% p.a. last 10 years. So........Income = $200,000 p.a. But after expenses incl. bank loan (not incl. J/V equity partner payback) = $50,000. What's in it for the J/V equity partner? Cash flow p.a. plus initial investment back in say 3 years when i re finance and give back to JV partner? Growth of value of asset per annum is 5% of $4.5 million. Looks like that's an increase of around $225,000 per annum, correct? Does this make the deal worth a look? Refinance potential in 2-3 years? Am i on the right tram? Thanks. G

 

Interesting proposition- main question for me would be capital growth may be flat or worse in next 3-5 years.. could this affect the refi?

 

Good point Oz. Worth covering myself and investor/JV partner if i cannot refi sufficiently in next few years. The good news is if i look at previous 100 years trend, then this real estate asset is very likely to continue to grow in value in my lifetime. Question is - How do i cut JV equity partner into the deal? What's in it for them? Cash flow? part ownership of asset? Yep, i can offer these things.

 

"Nothing" in it for a JV partner in this deal...

Unless you are going to renovate the product/ enhance yield or create some form of value like adding extra inventory on the exis land and increase number of units, I would be scratching my head in justifying participating as an investor..

I am however bullish on the prospects of units and currently assessing similar deals in inner east - however I don't factor any borrowings in my calcs (self fund) and the yield is tad lower vs yours but with increasing int rates, that $50k can disappear pretty quickly and then if you are not adding value and the 5% doesn't happen for another 5 years then it's a dud investment for a short- medium term... Long term, block of units in inner Mel will do really well....

Anything with a 3 yr horizon in current market conditions with increasing IR and very poor yield with bank borrowings is a risky proposition..

 

What are you putting in and why does the jv partner need you?

 

Assuming 5% compound growth and using present interest rates ? That ambitious. Cant imagine any money partner seeing reason to get nothing back on this deal. Its all their money and risk really. And you cant even offer them a committed future price as you can finance it now. JV partner would be a joint borrower to the proposal.

Who funds the duty ? Do costs allow for land tax ? Selling costs alone could be significant.

What income will service a $3m loan... $200K ? LOL

 

$50k/$4.5M x 100/1 = 1.11% return

I'm sure someone else could make it work but on face value it is a sinkhole.

Have you checked the zoning to confirm that it's not a development site with potential for 12+ additional units?

 

While I agree it's not particularly attractive, that is not a fair way to calculate return. He is not investing 4.5 million so don't calculate the return as if he's actually putting up the money.

 

That is the ONLY way to calculate the return. Development models, IRR and NPV all rely upon 100% loan for the calculation, you can't simply ignore borrowed funds or capital.

Cash on cash ignores the basics.

 

Could u find such a JV partner? What would a lender think about it?