How do you know if a 10-unit apartment building is a deal?

[Jacquelyn Swint]

What are the steps necessary to evaluate this apartment building? Several units have tenants. 

[Jeff Greenberg]

I see some good information in this thread, but I think that the real point is being missed.

"Several units have tenants." Now what does that mean? I would guess that is more than two. It doesn't tell me if they are paying or not. So if we assume that your three tenants are paying what is the value of the property. Typical underwriting would take the annual revenue, times .5 (.4 if it is all bills paid) which gives your net operating income. Multiply that number by the market Cap rate and you have the current value The problem here is that it is 30% occupied and it is pretty doubtful that you can buy it at that number.

Now we can take the market rents for this type of property, in this neighborhood, and this condition. Reduce that number by the market vacancy. Now go through the same process and you can see the value at market rents, at market occupancy.

Now you would like to buy it based on the 30% occupancy number, but the seller would like the market occupancy number. Anything beyond it's current value is speculating that you can improve the performance of this property. We certainly don't want to buy a property based on a projected value and have to do all of the work to get it there. We certainly would have to move off of the current value, but we want to keep enough of the value add that we are putting into it, so it would be a very sweet deal if we do get it to perform up to market. I have seen many times that the seller want s you to pay for the value of the property that you can create, not what the current value of the property is.

Now all of this discussion above does not bring into consideration the condition of the property and the cost of bring it up to the level of greatest potential. I also did not discuss any holding costs as this is probably an alligator needing to be fed. There is not enough information provided in this thread to provide much more of an answer.