How to value a mostly vacant multifamily

[Dave Carter]

I'm looking at a group of four 8-plexes on the MLS in Illinois. #1 has 5/8 units occupied, #2 has 2/8 units occupied, buildings 3-4 are vacant. Based on the numbers provided, the four buildings are collectively losing $10k a year.

How would you come up with a valuation with a negative NOI? If all units were rented at $550 (I don't know the unit specifics), half going to expenses would yield a 6% cap rate at the asking price of $400k per building. Given the industrial city and location, I would think something closer to 7-8% would be more appropriate.

I don’t know if the vacant units are habitable or not. Many questions to answer but I’m starting with valuation based on what I know.

Thanks!

Dave

[Brad Hayden]

@Dave Carter

Dave, good advice from both Lucas & Mike. Mike's method of using the stabilized value minus costs to get a price is a good start, but another consideration will be how the lender values the property if you plan to use financing. The lender will require an appraisal which will include valuation through income capitalization, replacement cost, and sales comparables. Income capitalization will basically be ignored due to the negative NOI so that only leaves replacement cost and sales comps. Traditional banks are unlikely to finance a project with negative NOI so that leaves private non-bank lenders. Lender amount, rate, & terms will look at current property value, but they will place significant consideration on your investment plan, the projected future value, and your experience with this type of project.

You need to be able to answer the following questions - in detail:

• What is your investment plan; how will you increase the value? Is it as simple as increasing rental rates, reducing expenses, reducing vacancy, or addressing other economic factors; or will it require repositioning with different tenants; or perhaps adaptive reuse to a different purpose; or …? How much will it cost, how long will it take, and what impact will it have on current tenants, operations, and cash-flow?

• Does it need minor repairs, major renovations, or other capital improvements? How much will it cost, how long will it take, and what impact will it have on current tenants, operations, and revenue?

• Equity - How much skin do you have in the game? Will you bring in partners and/or 3rd party investors? How will they get paid? How will you get paid?

• Will the local market support your plan? “Build it and they will come” was a great catchphrase for a movie, but local market realities may not be so forgiving. Occupancy trends, population trends, employment trends, competition, traffic patterns, economic development programs and priorities, zoning, and permit filings are some of the factors that may impact your plan and the future value of the property.

• What is projected future value? Based on your plan and your projection of future market conditions, what will it be worth 2-5 years down the road?

• What is your exit strategy and timing?

Hope this helps. Let me know if you have additional questions.