Multifamily property

[Rikard Lorén]

Hello !

So I have a question, I listening to Ken Mcelroy and he says: to get a value of a building, take the net operating and divide it with the going capitazilionation rate.

So, on one building here, I did it and:

Price: 4,3 Million

Income: 434 000 /year

expenses: 75 000/ year

434 000-75 000= 359 000

so: 359 000 ( net operating ) divided by 6% ( capitalitation rate ) = 5 983 333

So: If we say that the net income is correct, and the cap rate, does that then mean that the seller COULD sell it for 5 983 333 and is loosing money but he don't know it ? and then thata if I bough it, I would make a profit of 5 983 333-4 300 000= 1 683 333 million ?

SO Question: If the numbers are correct, income, cap rate and expenses does that mean that the building is worth atm 6 million and the seller is making a loss, selling it for 4,3 million and COULD sell it for the 6 million instead ? or I'm missing something ?

//Rick

[Joel Owens]

The valuation is crap.

No way you have gross income of 434,000 and expenses of 75,000.

75,000 / 434,000 is the seller saying the property runs at 17% costs including property management, operating expenses, and vacancy. That's not going to be the case with apartment buildings.

If you self manage and the place is brand new and you defer everything with repairs then you could say maybe 40% to 45% costs but then you are buying a job with PM work. If you are buying a building where landlord pays utility go 60%. If not I typically use 50%.

You have to know what operating costs should be and run your projections off of that not what some seller who is trying to sell you a bill of goods is telling you.