Making an offer on a MF property that needs repairs

[Patrick Elias]

Hey BP! I am planning on putting an offer on a 16-unit MF complex in Austin. This property needs some CAPEX spend like a new roof, foundation and AC units. I might be getting too caught up in the weeds of the #"s, but when analyzing my offer for residential I simply subtract those repairs needed from the ARV. I don't feel like it is that simple for MF, if the CAPEX spend will be 300k, does my offer need to be 300k less?

There is room to increase the rents by putting these repairs in, so theoretically, I am raising the value of the property if I put in that CAPEX investment. The amount of $$ I am spending to raise rents is not justifying the new value of the property with the new NOI. Hence, why I would like to make an offer at a higher cap rate than the market.

If I purchase the property at a 8% cap, can I expect to sell it at the market cap (5.5%)?

[Michael Garofalo]

@Patrick Elias I don't think it's fair to say if the property needs 300k then you should just automatically lower your offer by that amount. It's not black and white with MF and even though you think it will only be $300k, I can almost guarantee that number will be higher once you get into the thick of the projects should you close on this property. Over the past 8 years, I have purchased smaller multifamily (duplex) all the way up to an 11-unit complex and every single one of them had surprises even after I did all of my detailed due diligence. That has never bothered me because I am planning to hold everything for a very long time, but if you have a shorter-term exit strategy, I think you need to get a bit more granular as @Jaycee Greene has suggested and also look at overall cash flow and NOI with respect to raised rents and the level of vacancy you may experience.