A hypothetical six-unit Los Angeles apartment building is fully occupied and offered for $2.35 million. Annual scheduled rent is $186,000, and the sales summary points to higher market rents without specifying when each unit could legally reach them.
- Asking price
- $2.35 million
- Units
- 6
- Scheduled rent
- $186,000
- Normalized NOI
- $98,000
- Going-in cap rate
- 4.2%
- Modeled DSCR
- 0.89x
Scenario: six units and a $2.35 million asking price
The hypothetical property has six units with annual scheduled rent of $186,000. The marketing package emphasizes location, a gross rent multiplier, and potential upside to market rent. At first glance, the income appears capable of supporting the $2.35 million asking price.
Gross scheduled rent leaves out the expenses that stand between a signed lease and the owner's cash flow. Vacancy, collection loss, water, trash, insurance, property tax, repairs, landscaping, management, and replacement reserves all come ahead of debt service and an owner's return.
Normal expenses reduce the advertised income
Using 5 percent for vacancy and collection loss, along with modest laundry income, produces about $177,000 of effective revenue. Operating expenses total roughly $79,000 after adjusting property tax to the purchase price and including professional management. The remaining $98,000 of NOI equals a 4.2 percent cap rate on the asking price.
Management belongs in the analysis even if the buyer plans to self-manage. Personal labor has a cost, and future buyers will value the property based on normalized operations. Excluding management can make a small property look artificially efficient.
Current loan terms produce negative cash flow
With 65 percent leverage at a 6.75 percent rate and thirty-year amortization, annual debt service exceeds the property's NOI. A debt-service coverage ratio below 1.0x means the owner would have to contribute cash toward the mortgage even under the modeled operating year.
A lender would likely reduce proceeds or require a larger down payment. More equity solves the coverage problem but not necessarily the return problem. The buyer would commit more cash to an asset with a low initial yield.
$2.35Millustrative asking price
4.2%going-in cap rate
0.89xdebt-service coverage
Higher rent depends on legal increases and completed renovations
The market-rent argument has to be checked unit by unit. Rent regulation, tenant tenure, apartment condition, and the required renovation determine when a rent difference could actually be captured. The base scenario keeps current tenants in place under their existing legal terms instead of assuming immediate move-outs or large increases.
A vacant unit requires renovation spending and loses rent during construction and leasing. Turnover should enter the forecast gradually, with a faster pace treated as additional upside instead of the outcome needed to make the purchase work.
The numbers begin to work near $2.05 million
At a 5.0 percent cap rate, current NOI supports a value of about $1.96 million. Strong location and documented rent growth could justify paying somewhat more, while the full asking price requires either favorable seller financing or a meaningful increase in income supported unit by unit.
I would pass at $2.35 million and reconsider the property below roughly $2.05 million, depending on the inspection and a review of the local rent rules. The neighborhood may support long-term demand, but the income in place today still has to cover the debt and ordinary repairs.
At $2.35 million, the building’s current income doesn’t cover the modeled debt after ordinary expenses are included. I could make the spreadsheet look better by assuming faster rent growth or removing management, but neither choice would change what the property earns today. Around $2.05 million, the cap rate and debt coverage begin to leave more room for repairs and vacancy. I would still need the leases, rent records, and inspection before treating that lower figure as a real offer.
I used the filings, reports, public records, and articles linked below. Figures in the three case studies are practice numbers and are identified near the top of each article.
01City of Pasadena housing market plan↗02Federal Reserve commercial real estate risk discussion↗