What to offer on a triplex...

[Jonny Morris]

Evening all, 

I am getting lost in NOI and Cap rates. What is the formula or points of reference to calculate investing in a multi-family?

Can I work backwards from a projected rent? Lets say each door rented for $700. It would generate $2,100 per month. Tentatively estimate (for convenience) the 50% rule for expenses. Plus mortgage. Im left with cashflow. Obviously, how much I throw down for deposit and rehab would allow me to calculate the ROI.

I would like to BRRRR but am aware that being a multi-family it would be appraised by either market value or income.

Can someone slap some stone cold formulas or knowledge down please? 

[John Leavelle]

@Jonny Morris

This is how I approach BRRRR properties.

Quick analysis:  Property must meet the 1% rule (rent to asking  price ratio).  $100K  = $1,000 Rental Income.  It must Cash Flow a minimum of $100 per unit/m using 50% rule.  If it meets both it’s worth taking a closer look.

I prefer the current rent to be below market rates.  That way I can raise them after the Rehab.  

The most important part of the process is establishing a solid ARV based on recently sold comps. I then work backwards from there to determine my Maximum Allowable Offer (MAO). Here's the formula:

ARV x 70% - Rehab Estimate - Closing Costs - Holding Costs = MAO

I use 70% to determine my All-in cost Target. Most Refinance lenders provide a loan amount that is 70% - 80% LTV. Typically it's 75% . I want to try and keep my costs under that amount. 70% gives me a little buffer encase my Rehab goes over budget or the appraisal comes in lower than expected.

Then it’s just a matter of subtracting all my costs to figure out what my max offer can be.  Example:

$100,000 ARV x 70% = $70,000 All-in

- $20,000 Rehab 

- $5,000 Closing (Acquisition Closing, HML Points, Refinance Fees)

- $5,000 Holding 

= $40,000 MAO

Holding costs include (but not limited to) loan payments, insurance, taxes, utilities, HOA fees, etc., that occurs during the Rehab period and up until the property is fully rented.

I get a lot of “NO’s”.  But, when I do get a Yes it’s a good deal.