Lima mixed-use at PEN 1,631,000: can the cash flow work at 7.43% finance?

P

pine.bold

Real estate agent
I’m looking at several mixed-use buildings in Lima around PEN 1,631,000. Once I include vacancy, management, maintenance, insurance, property tax and finance at 7.43%, each model turns cash-flow negative.

This would be my first purchase, and I’m also trying to decide how much weight to give a school catchment when part of the income is commercial. Would you lower the offer, contribute more equity, accept a weak current return, or wait? I’d especially like to compare real operating assumptions rather than headline gross yields. If another market works differently, please identify what changes the calculation.
 
First separate the property from the financing. Calculate net operating income before debt, then compare that with the annual loan payments. If the building produces an acceptable unlevered return but fails after financing at 7.43%, the choices really are more equity, a lower price or different finance. If the unlevered return is poor too, extra equity only hides the problem.
 
What rents are you using, and how much comes from the commercial space versus the homes? That split matters more than the catchment label. I would also want actual occupancy and tenant-turnover history. A single vacancy assumption across both uses could make the model look more precise than it is.
 
I agree with separating the two income streams. A school catchment might support residential demand, but it does not automatically increase the value of the shop or office portion. Model residential and commercial vacancy independently, along with different reletting costs and downtime. Also establish which recurring costs are actually paid by each tenant rather than assuming the owner bears everything.
 
A negative result in the stressed vacancy case is not the same as a loss under the current rent roll. Conservative assumptions are useful here, especially on a first purchase, but they should show where the risk appears rather than produce one blended answer.

I’d run the residential and commercial income separately under current occupancy, expected turnover and prolonged vacancy. Keep management, routine maintenance and a repair reserve in every case, then vary the downtime and reletting costs. If the model is negative even with current tenants and normal allowances, waiting or changing the price or equity becomes much harder to argue against.
 
True, but the current-occupancy case still needs management and maintenance allowances. Removing them because no expense occurred last month overstates sustainable cash flow. Even if the owner plans to self-manage, the building consumes time and will eventually need work. I’d treat those allowances as economic costs, then separately note what is paid out in cash today.
 
That distinction makes sense. Amir, a monthly model may expose the issue better than one annual percentage. Enter each lease expiry, expected empty period, reletting expense and known maintenance item by month. Mixed-use turnover can arrive unevenly, so averaging everything into one vacancy figure may conceal a period when rent falls but the loan payment does not.
 
Is the purchase, debt and rent all effectively in the same currency? If any part differs, financing sensitivity is not just about the 7.43% rate. Also, is that rate fixed for the period you are modelling or capable of changing? No need to predict future rates; simply test whether a higher payment would remove your remaining margin.
 
Another useful calculation is the maximum debt the existing net income can support without going negative. Work backward from verified rent, subtract vacancy and all operating reserves, then compare the remainder with possible loan payments. That gives you an equity requirement based on the building’s income rather than on how much cash you initially hoped to invest.
 
Some buyers may accept a lower current return because they expect rent growth or a higher resale value, but that is not the same as finding a cash-flowing rental. I would keep those expectations outside the base case. If the deal needs appreciation to compensate for monthly losses, label it honestly as an appreciation-led investment.
 
Because this is a first purchase and mixed-use, I would spend effort validating the expense side rather than refining a yield to another decimal place. Obtain the actual property-tax amount, an insurance indication for this particular building, evidence of recent repairs and a list of deferred work. One roof or shared utility problem can affect both parts of the property.
 
The rent evidence deserves the same treatment. Asking rents from nearby listings do not prove what these occupants pay or whether they pay reliably. Request the current rent roll and leases, then reconcile them with payment records as far as the seller can substantiate. Any difference should flow back into your price or vacancy assumptions.
 
On the school point, I’d test it rather than pay for it automatically. Compare the residential rent you can reasonably support with similar units outside that catchment, while keeping size and condition in mind. If your model already uses ordinary Lima rents, adding a separate catchment premium could count the same supposed advantage twice.
 
My decision rule would be simple: use verified current income, separate residential and commercial turnover, reserve for maintenance and management, and stress the 7.43% financing. Then calculate the price or equity level that produces non-negative cash flow without assumed appreciation. If the seller’s price remains PEN 1,631,000 and that gap is too large, waiting is better than forcing the spreadsheet to approve it.
 
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