How do I determine an ARV on a small apartment building?

Question

Hello BP Family!

I found an apartment building in Atlanta that hasn't been updated in forever...if ever. It needs a lot of work, inside and out and I want to make a reasonable low offer on it and don't really know how to determine the ARV. Just so you know, it's in a great area with good schools and great neighborhood...the place stays rented, but it's a dump! A dump in a great area and the owner doesn't seem to give a crap about it and only does bare minimums.

It reminds of the house I just bought. The owner-occupant only did bare minimums and never updated anything and I got it for a really good price because she wanted out. I'm thinking this is the case for this apartment building. The owner doesn't seem to give a crap so I want to make a low, but reasonable offer based on the ARV.

How can I get a rough ARV without spending a lot of money on a full commercial appraisal?

Phil

Crystal Smith · Answer

@Philip Bashaw, back to your original question on how to determine the potential ARV of the property.  If $1250 per unit rent is reasonable then assume 16 units *1250/month*12 months give you $200K gross Income.  Assume 10% vacancy & the gross income would be $180K.  If you're going to live in the units and/or provide a unit to a maintenance person for free then reduce the gross income.

You can then use a Gross Rent Multiplier (GRM) to determine the ARV or back into a number using a CAP Rate.  If it will be an A class property then a GRM of 6 to 7 is reasonable putting you between $1.2M & $1.4M.  You'll have to check to see what GRM is being used in your area for this class property.

If you want to use CAP Rate you'll have to again check to see what's an A class Cap Rate for your area.  If it's 6% then your ARV will be ~ $1.8M

Kiran K · Answer

How much will the rents that can be collected if the property is brought back to good condition and can start collecting market rents for the property.

If you are saying the place is in a good area with good schools but in bad shape you are talking a B- or C type property in A or A- area and you have capabilities to bring it back to A type property. Cap Rates are running around 7 to 8 for these type of properties right now so you can calculate your ARV based on 7 and 8 cap rate and come up with a value.

You need to have clear understanding of what repairs are needed to bring it back to A type property.

Account Closed · Answer

Get a firm grasp on verbiage and calculating the standard formulas before a temping to make an offer on a property if it is a commercial deal (5+). Residential (4 units and under) will go by the comparable market analysis of the area. A good agent should be able to provide you it that. You also need to have a grasp on estimating rehab costs to even know what to offer. J Scott has a book on that very topic. My copy is in the mail so i have yet o read it but J Scott is the real deal so I will automatically recommend it.

Jeff Kehl · Answer

If it's in a good area of Atlanta, $1250 rent should be doable for nicely renovated units. It's hard to find a decent place to rent for under $1000 most good area there.

I personally would not burn 3 units for you and a manager to live in but let's say you do.

13 units x$1250 x12 = 195k gross rent.

with 50% rule your noi is: $97.5k

At an 8 cap that's $1.2 million.

If you use all 16 units as rentals, the number is $1.5 million arv.

Keep in mind your expense are probably going to be less than 50% the first few years if you've just rehabbed all of the units.

Another consideration is that a ton of new units are being built around Atlanta right now so that might make rents softer in the next few years.

Albert Bui · Answer

you'll need to do a lot of adjustments since with all of the latest upgrades your operating costs might go down substantially. If you go with a lot of the latest energy efficient appliances, HVAC, electrical, and pex plumbing, etc etc.

So to get the most accurate projections you can look at the most recent local comps in the area and what there financials are to make the most accurate adjsutments for your building. You can ask brokers for these comps or if you have a Costar subscription which is like 4-5k annually you can see every single commercial building, its operating statements, owners, partners, rent rolls, etc in the market and you can use this to do your research and get updated data from their researchers but its not cheap.

If your current tenants are C & D tenants but this is an A buildingpotential/area and you plan to slowly reposition the tenant base from C & D to A tenants then you can get A tenant comps to to see what a typical A building has for:

- vacancy rates, occupancy vs actual economic occupancy (people who live there vs. people who live there and actually "pay). This gives a good idea of what your gross margin is on your rental income prior to hitting your numbers with the below operating costs

- operating costs for after rehabbed A class repositioned building and adjust accordingly from your current operating expenses

- do the same adjustments for income when comparing A class rental apartment buildings after you've raised your rents

At the end of the day when your done with these adjustments you can figure out what your adjusted NOI will be and then adjust your cap rates as well to get them near what A Class buildings sell at currently.

adjusted NOI/ adjusted cap rate = projected value

If you want to be conservative have your local bank run his Cap rate and underwriting rates through the projection and this will give you an idea of what the banks value will be and if you're off or not.

You can then ask your local brokers to see at what cap they think your building will sell at and adjust your cap rate accordingly to arrive at a more and more accurate valuation.

If the total all in costs of 800k acquisition price and 560k rehab is at 70-75% of the projected value you can probably jump for joy because after obtaining this financial performance for 6-12 months of stabilized rents you can probably cash out the entire 1.356M and generate an infinite return as you will have all your original capital back and perhaps even beyond what you initially contributed...

Hope that helps.

Philip Bashaw · Answer

Thanks @Aaron Mazzrillo,

Further information as requested:

This is an off market property and I would live in 2 units and convert them into a 3/2 condo and also have on site maintenance man/property manager living in one unit for free. He will only pay for his utilities and in exchange he will collect rent and do all necessary repairs that come up. The numbers work out better than paying a property management company.

I don't know what GSI, PSI and deferred maintenance means, but I'm a fast learner and can get that info quickly or tell you if I have an explanation of the terms. It is a single 2 story building with 16 units at 850SF each. They are all 2BR/1BA and it has on street and off street parking and also has a laundry room. Market rents right now are $950-1000/month for a similar properties in similar condition. This is also an A neighborhood with C-/D+ property and I have J Scott's book, but he doesn't delve into multifamily over 5 units.

Once renovated and updated to 2015/2016 standards with A/C, new windows, new flooring/carpet, renovated kitchens & bathrooms, paint, new decks for upstairs units and new patios for lower units as well as upgrading the laundry room with new or newer commercial grade machines. It will generate a little money, but not much. Additionally, the property will be professionally landscaped and maintained. I'm figuring on approx 35K per unit for all repairs and upgrades, inside and out. 16 x 35K = 560,000. I also don't want to pay more than 800,000 for the building as is, hopefully much less. There aren't really that many comp's but I know similar units went for 85-90K each a year or so ago, but they were in better shape and didn't need as much work as this building does.

Once renovated, I will charge $1250/month rent with and annual increase of 3% per year. My plan is to use this building as a prototype, learn from my mistakes and then move on to another purchase and rehab once this one is complete. My goal is to own 200 units under a corporation or land trust within the next 5-7 years.

I hope this helps with the information requested. Thanks!

Aaron Mazzrillo · Answer

Need more info; units, GSI, PGI, any area comps, how much deferred maintenance is there, etc. More details please.

Philip Bashaw · Answer

@Crystal Smith

Thanks for that simple calculation. I wasn't too far off with my guesstimate of the ARV being around $1.5MM. Quick question: Does the value go down if I'm living in the building and having a unit for a maintenance person? I know the income will be lower, but will the value? I'm thinking as an income producing asset the value will be lower, but the overall value of the building will keep appreciating.

After the initial round of rehab and refinancing, I plan on looking into buying an additional parcel and adding additional parking to make it all off street parking for gated entry only.

Philip Bashaw · Answer

@Rick Baggenstoss

Thanks Rick! More good advice and I will work on contacting the owner this week. I know 800K is low, but I've asked my contractor friend and an owner of a 28 unit building in Decatur and he suggested I make an offer of 55-60K per unit. Also, part of the per unit pricing is for exterior improvements ie decks, patios, landscaping. fencing and upgrading the laundry room...the floor plans are good and no walls needs to be moved, but I think some good design advice in the kitchen will add tons of value for the tenants.

@Albert Bui

Albert,

Thanks for your input on determining value. I will start working on that soon. I like your thinking on cashing out, but I was planning on holding this building long term and getting a commercial FHA loan for 30 years at a really low rate. I've read a lot about those loans and I know it takes a long time to secure one. The 223f loan doesn't cover repairs so everything would have to be done prior to securing it and the value would have to be there as well.

@Seth Wilson , @Crystal Smith & @Colleen F.

Hey Guys!

I have talked with some of the residents and they said they'd be willing to pay more for a much nicer place and the current market rents are $950-1000/month for this property and others like it. Other apartments with full amenities are getting $1700+ for a 2BR/1BA unit, so $1250/month is not unreasonable for a spacious, comfortable and convenient living space. I plan on adding A/C to each unit individually so all would have a separate utilities.

There's enough parking on site to guarantee 1 space per unit and street parking is very common here, even for some of the $750K+ houses in the neighborhood...city life. Another thing is that I'm planning on doing 2 units at a time as the leases run out so I can keep the monthly cash flow going and make the loan payments. I can flip 2 units in 30 days or less with a good action plan and I'll only get better and better at doing it. The key here is getting for a good price and working from there and then get the financing in place. I'm already working on that.

The projected rents with just 13 units generating income will cover all the monthlies during the rehab process with very little extra. However, once everything is complete and I'm able to refinance the construction loan*, it will easily cash flow close to $3000/month.

*I'm looking into private money investors and a lower interest commercial loan because this deal doesn't work with hard money...the rates are too high

How do I determine an ARV on a small apartment building?

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