Valuing Apartments with No Income

[Corey Smith]

Hello BP world,

I’m preparing for a listing presentation on a 20 unit apartment complex down here in Houston, TX. I’ve heard extensive talk about many different situations in regards to managing, valuing and renovating apartments. The one thing that I’m finding extremely hard to find information on is How to Value an Apartment Complex when it’s making little to no income.

The 20 unit I’m referencing is 30% occupied with about $150k worth of rehab that needs to be put into it. There are not many if any apartment complexes that are similar in units that’s located near this property, so I don’t see me being able to use comparable method in order to get a valuation. Any insight or point in the right direction would be greatly appreciated. Ok, now for the numbers.

Currently Rented: $500 for 1 bedroom $600 for 2 bedrooms

Pro Forma Rent (After Rehab): $700 1 bedroom $750-800 2 bedrooms

Unit Mix: (12) 2 bedrooms and (8) 1 bedrooms

Rehab (Estimated): $150k

Occupancy: 30%

Taxes: $10k

Insurance: $7k

Notes: No rent roll & no P&L statement for YTD nor past years. Rent collected was mixed with personal funds, no business account established for property. 

[Account Closed]

Simple answer, hard to get the information.

Step 1.  Estimate the rent income as if the units were leased under the planned renovation.

Step 2.  Estimate the expense of the fully operational property.

STep 3. Calculate an "as if completed value" based on the NOI that you created above.

Step 4. Estimate the cost of renovation and subtract from the calculated value.

Step 5. What you have left over is the max value (ie flip value).  Discount this amount so that it reflects the time and risk of undertaking the investment. I would do at least 20% discount if not double that.

Big question, why the high vacancy?