10 unit Multi-Family value

[Trevis Kelley]

Hi!  I have only posted here a couple of times, mostly because I like to find the answers on my own.  I am having trouble with MF value.  I have read many, many forum posts, blog posts, and heard it talked about again and again on the podcast, but I am thick-headed in some things and this seems to be one of them.  I am currently looking at an MF that is being sold by an investor who is retiring.  He's been in the game for 40 years and wants out.  I see this as an opportunity to be able to come at a guy with numbers and walk away with a deal that will cashflow decently while at the same time giving this guy the ability to retire from a solid investing career.  Here's my issue: it only cashflows at 35% equity or more.  I am new to the game, but I see that as a problem.

I will post this deal later for analysis, but right now, I am trying to figure out value for the property. I understand the NOI/CAP rate, but I cannot for the life of me figure out why that would be important. I also do not understand NOI. Sometimes it includes all expenses, sometimes it seems to be income-mortgage, sometimes it seems to cherry pick. And here I was thinking that MF values were easier to determine. So, back to my question: how should I come up with a number to show this retiring investor?

I could determine based on CAP rate, but it seems like the thing should at least break even at 0% and be pretty cash rich at 20% down. Is that pie-in-the-sky dreaming by me? Or is that what everyone else is seeing? Shouldn't value be more determined on where the property breaks even? I know I am bucking the system (I tend to do that a lot), but it doesn't make sense to me, and I am beginning to get frustrated. So, I thought I would turn for help. I would really like to buy this at a price that cashflows for my partner and I (OK, I admit it - it's my dad), but I really don't want to put more than the normal 20% down.

Any and all advice is welcome!  Thank you BP community!

[Michael Seeker]

Hey @Trevis Kelley - without more info, it sounds like the place is over priced.  If you need to put down 35% to break even then it better be in downtown Manhattan or San Fran!

NOI is the key thing you need to be able to determine. It is not income - mortgage. NOI is income less vacancy, taxes, insurance, expenses and CapEx. I would never take an owner/agent's word on what NOI is or should be. You want to be able to estimate this very well based on your own knowledge/research of the area.

Once you've got an NOI, then you can look at going CAP rates for the area. A normal range would be somewhere between 8 and 12%. Anything above or below that for a stable property would be getting towards very premium areas or not so good areas.

If you come up with an NOI of 60,000 and the going CAP rate for the area is 10% then a fair price would be about $600K.

You can then go 1 step further and figure out the DSCR (debt service coverage ratio) which should be 1.2 or better.

I highly recommend reading Commercial Mortgages 101 by Reinhard which covers this valuation in great detail as well as getting into the lending side of things.

Bottom line - a true, reasonable NOI is key and you should be able to come up with that number on your own based on current/projected rents and projected expenses, not current owner's stated expenses.