14 Unit Property available and I dont know where to start

[Gladys Pilarski]

A co-worker (we will call him Charlie) just inherited a 14 unit property. They have no interest in being the owner but know that my husband and I have been considering real estate investing. With that said, we only know what we have read and have no practical experience. The property is in a transitioning area of Atlanta, Ga. Charlie is supposed to bring us some records to review on Monday..... but what questions are we asking before this even get started.

All we know is 10 units currently rented, avg rent $1035 per unit. 2 units vacant, 1 unit needs some upgrades, 1 was gutted for renovations but was not completed before the owner passed away.

From pictures the building looks in good condition, brick - but we plan a drive by this weekend.

Where do I start to get a value? What questions do I ask?

Any information would be appreciated!

g

[Rodolfo Canon]

@Gladys Pilarski, The property value comes from its income. There is a simple formula called "IRV." You can make some assumptions about the property, creating a "Pro Forma" income statement. For example, an assumption would be that you can repair the units and rent all four of the vacant units at the same rent as the other 10. The timing assumption would be that you can rent them immediately (not likely)

Net Operating Income (I) =   Capitalization rate (required rate of return-R)   X   Value (V)

NOI = 14 x $1035 = $14,490 x 12 = $173,880; minus 30% in operating expenses (reasonable assumption) = Net operating Income (I) = $121,716.

R = 6% (assumption of the required rate of return on your invested capital)

Value is equal to $121,716 / .06 = $2,028,600 in the Best Case Scenario

If fully rented at $1035 per unit and A 6% cap rate, the property is worth ~$2M. 

However, that is not what you would be buying. You would be buying a property with 10-units rented, two vacant, and two in need of repairs. 

Further, if you do not know what other similar properties are renting for you might be buying a pig in a poke.

You also do not know when the existing tenants' leases will expire 

What if they expire on the same day? What happens to your cash flow? 

What is the history of tenant turnover? 

Do they renew their leases? If not, why not?

What is the estimated cost to get the two units in need of repair to the market standard?

How long will that take (they will not be producing income)?

@Charles Kao is giving you some good advice. Get educated on the industry.