Help with underwriting a 15 unit property

[Ryan Miller]

I currently own a portfolio of single family and small multi buy and hold properties. There are also a few short term rentals in the mix. I have an opportunity to purchase a 15 unit property using owner financing but he would like me to give him the sales price. He has agreed to a 20 year low interest note but wants me to make the offer for the price. I do not have experience in underwriting a larger property like this so I am looking for help.

The property has 15 studio apartments, 10 are currently rented. Each unit gets $550-$700 per month. Rent does include electric and water. I do have the owners last two years financial statements. His net from 2022 was $86k and he owns the building free and clear. He's on pace to make $70k this year. It's lower since he has not worked on filling the vacant units (he owns 200+ properties and this one is not a priority) which I would be able to do with no issues. I would need to put some work in the vacant units: paint, flooring, but nothing major.

I am just not sure how to price this property; any help would be appreciated! 

[Greg Downey]

I would that his T2 (trailing 2 years financials) and see if you believe those expenses are appropriate moving forward. They usually aren't. You'll need to account for more expenses (get an insurance quote!). Once you have that, you can calculate an NOI (net operating income).

Once you have a real NOI, you can take THAT number and multiply by 1.25. That would account for the property being at a 1.25 Debt Service Coverage Ratio.

THEN take THAT number, divide by 12 to get a monthly payment (P&I).

THEN just plug into an online mortgage payment calculator, set the interest rate and manipulate the purchase price to match the P&I that you solved for.

Voila! That is your purchase price. 

The tricky part is, do you use the interest rate that he is offering you or do you use the interest rate the the market would offer you? Thats between you and...you.

Once you have that number, you can make sure that it makes sense with local CAP rates. I just like solving using DSCR if there is financing involved since.....financing is involved.

Hope that helps.