28 UNIT VALUE-ADD OH ARV

[Lauryn Meadows]

I found a bank owned 28 Unit in OH. The bank wants to start at $350,000 (which sounds low enough to get me excited). I'm sure this will need significant repairs as it's completely vacant. I'm going to look at the property tomorrow. I'm guessing it'll be an $800,000 investment with PP and rehab costs. I'll know more after tomorrow. 

If we did a deal like this I would want to use private capital (short term money) complete the rehab and get the rentals rented in 12-18 months and then get a bank portfolio loan. So you can imagine the importance of getting the ARV right on a property of this size.

I've been calling local commercial appraisers but the have been very unclear on what the market's cap rate is to determine the ARV. What measures do you all take to make sure you all come in at the right numbers for your ARV when you do an 80% LTV with the bank?

[Theo Hicks]

Hi Lauryn,

First, you need to determine the NOI once the property is stabilized. Since you have an idea of the renovation costs, I am assuming you also have an idea of the type of renovations you will perform. You want to perform a rental comparable analysis to determine what the rents will be based on these renovations. Find properties that are similar to your stabilized property, not how it is now, calculate the rent per square foot, and assume you will achieve a similar rental amount. Then, subtract out all of the expenses to get the NOI.

Similarly, you want to determine the cap rate that will be used. Speak with a few commercial real estate brokers, explain your business plan, and ask them what they think is a ballpark cap rate assumption to use. It is impossible to know for sure, because know one can predict cap rates 12 to 18 months out. So, I'd add 20 to 50 points (0.2% to 0.5%) just to be conservative.

Then, divide the NOI by the cap rate to get an estimated ARV. At this point, you want to make sure that 80% of the ARV is enough to pay back the private lender with interest.