Amir's 6% Cap Test

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This page answers Amir's questions directly. It does not assume Amir's numbers are right; it shows what his assumptions imply and what must be verified.

Amir's questions

> Enter rental income after completion, get net operating income, calculate cap rate at completion. Must be 6%+ capitalization rate at the outset. Use $3M purchase price, $250k renovation work, $3k 1BR rent, $3,800 2BR rent. If using a $2M loan, use 6% interest. Find free cash flow after all expenses at completion.

Inputs used

Input
Value
Purchase price
$3,000,000
Work budget
$250,000
1BR rent
$3,000/month
2BR rent
$3,800/month
Unit mix
6 x 1BR, 2 x 2BR
Loan amount
$2,000,000
Interest rate
6%
Debt assumption
Interest-only unless lender terms say otherwise
Required cap rate
6%+ at completion

Rental income after completion

Unit type
Count
Rent / month
Monthly total
Annual total
1BR
6
$3,000
$18,000
$216,000
2BR
2
$3,800
$7,600
$91,200
Total
8
$25,600
$307,200

So Amir's rent assumptions imply $307,200/year gross scheduled rent before vacancy, credit loss, taxes, insurance, utilities, repairs, management, legal/compliance, and reserves.

Simple 6% cap-rate answer

There are two possible denominators. This matters.

Denominator
Amount
NOI needed for 6% cap
Max annual operating expenses from $307,200 gross
Purchase price only
$3,000,000
$180,000
$127,200
Purchase + $250k work budget
$3,250,000
$195,000
$112,200

Cleaner read: use purchase + work budget. On that basis, the property needs about $195k NOI to hit 6%.

That means all operating leakage — vacancy, taxes, insurance, utilities, repairs, management/admin, legal/compliance, replacement reserves, etc. — must stay below about $112k/year, or 36.5% of gross rent.

Free cash flow after debt, simple version

If the $2M loan is interest-only at 6%:

$2,000,000 × 6% = $120,000/year interest

At the 6% all-in cap threshold:

NOI needed = $195,000
interest-only debt service = $120,000
free cash flow after debt = $75,000/year

That $75k/year is before principal amortization, income taxes, owner compensation, and any capital surprises.

Expense sensitivity

Operating expenses as % of gross rent
Annual expenses
NOI
Cap on $3.0M purchase
Cap on $3.25M purchase + work
Cash flow after $2M loan at 6% interest-only
30.0%
$92,160
$215,040
7.17%
6.62%
$95,040
35.0%
$107,520
$199,680
6.66%
6.14%
$79,680
36.5%
$112,128
$195,072
6.50%
6.00%
$75,072
40.0%
$122,880
$184,320
6.14%
5.67%
$64,320
41.4%
$127,181
$180,019
6.00%
5.54%
$60,019
45.0%
$138,240
$168,960
5.63%
5.20%
$48,960
50.0%
$153,600
$153,600
5.12%
4.73%
$33,600

Stricter calculator answer

The calculator separates vacancy, operating expenses, property tax, closing costs, and the work budget. Using the current default version of Amir's preset:

Metric
Result
Gross scheduled rent
$307,200
Vacancy / credit loss
8%
Operating expense before property tax
25% of collected rent
Property tax
1.25% of purchase price
Closing / acquisition costs
2% of purchase price
Total basis
$3,310,000
Annual NOI
$174,468
Yield on all-in basis
5.27%
Cap on purchase price
5.82%
Annual interest-only debt service
$120,000
Free cash flow after interest
$54,468

Under these stricter assumptions, Amir's preset is close but not a clean 6% buy. The answer changes if the real expenses are lower, the rents are higher, the purchase price is lower, the loan terms are better, or the $250k work budget proves inadequate and needs to be increased.

What to verify before trusting the result

  1. Are $3,000 1BR and $3,800 2BR rents actually achievable after completion?
  2. Is $250k enough to reach that rent level, or is it only a partial/cosmetic work budget?
  3. Are property tax, insurance, utilities, management/admin, repairs, legal/compliance, and reserves realistically below the 36.5% all-in threshold?
  4. Is the $2M loan interest-only or amortizing? Amortization materially reduces cash flow.
  5. Should the required 6% cap be measured on purchase price only, or on purchase + work budget? The latter is cleaner.