HELP Evaluate a multifamily

[Irving Moorehead]

Good morning, I've been a member of BP since May 2023 but I just upgraded to a pro membership today. I have a few single family and dupIex buildings. This will be my first commercial property if my bid is accepted. I need help evaluating a multifamily property (6 units). I'm in St Louis, MO. I've been working on this since yesterday but my numbers don't make sense. I'd like to make an offer before COB today.  

[Joshua Christensen]

Quote from @Irving Moorehead:

Quote from @Joshua Christensen:

@Irving Moorehead

Have you looked at the tools section here on Bigger Pockets?  Evaluating a 6 unit is not much different than a duplex, other than 6 units.  You'll still be able to find sales comps.

Is the 6 unit a single building or is it 2 tri-plexes next door on separate parcels?  If it's 2 parcels, you may be able to do 2 conventional loans for the purchase.  Better yet, work on negotiating owner financing terms if available and set your own terms.

Know your current rents against projected rents and your current expenses against projected expenses. Know your improvement (CAPEX) money needed if any. Then look to see if it will cash flow to fit your portfolio goals.

Just because it falls into a "commercial" lending box, don't over complicate a small multi-family.  You can overthink it pretty fast.  When you start getting into 16/2-+ units, then you'll have more to consider, but for now, keep it simple.   

 Thanks for responding. It's one single building. They turned a 4 family into a 6 family. It's s legit 4 single BR and 2 efficiencies. I've done my research on the rents in the area. They're definitely priced below market. It's in need of some updates. I'm using the tools right now. I wasn't sure if I was I was putting in the correct information since I got a negative cash flow.  

 Chances are you will get negative cash flow on these smaller deals.  Depending on how long the seller owned it, he may have cash flowed fine off his purchase price 20 years ago and hasn't raised rent to market.  

Evaluate how far off the rent is.  Are they month to month or longer term leases?  How many are empty?  How quickly can you move rent to the market rate.  This is a value add play.

In your evaluation, you have to consider how long it will take to move to market rents and if those rents will cash flow.  If they will and it looks good, then make sure you build in reserves to cover the shortages monthly til you get there.

No Cash Flow day 1 is not always a bad thing if you account for it and have a good plan to quickly move to a cash flow position.  In these cases, you need to be able to negotiate a discounted sales price to offset the lower rents.  Current condition doesn't dictate the highest market value.