How Would You Value These 2 Apartments (6 Unit & 5 Unit)?

[Hubert Washington]

So I was telling a friend of mine that I am investing in multifamily / apartments and he asked me to analyze the two apartment buildings that he owns to get an idea of what he may be able to sell them for. However it appears to be a unique situation so I thought I'd reach out to the BP for some feedback.

Background:

My friend manages his father's trust in which the two properties are held. Currently all of the tenants are family members so the rents are WAY below market. I believe the area is also under rent control. So if the property is sold, I'm not sure if a new owner can even raise the rents to market immediately. Is this accurate?

Oakland CA - 6 units (all 2/1)

• Avg rent is $1065/mo
• Market rent appears to be around $2580/mo
• Expenses for 2015 were $35,835
• NOI = $40,845

Berkeley CA - 5 units (one 3/1 house and four 1/1 apts)

• Rent for 3/1 house is $1200/mo
• Market rent for 3/1 appears to be around $2390
• Avg rent for 1/1 apts is $470
• Market rent for 1/1 apts appears to be around $1470
• Expenses for 2015 were $19,110
• NOI = $17,850

My friend says that the properties are in good condition, but I'm sure they would have to be updated to get to market rents since the family members have lived in them for years. I believe CAP rates for the areas are somewhere are 5-6%. I know smart investors base their valuations on actual numbers but with such a large difference between actual rents and market rents how would you value these properties if you were looking to buy? Obviously there is HUGE upside for getting these rents to market. And is it realistic that my friend should expect to sell these properties for significantly more than the actual numbers warrant? As the trustee, he believes that he is responsible for selling the property at the highest amount possible.

As always, thanks for your input and I look forward to your feedback!

[Kathryn M.]

Probably won't be news to you, but there is a huge range in property values for the same Oakland building specs. Depending upon address, I could easily believe $650k - $1.5m but from your market rent quote, seems you are near the higher end??? Proximity to good schools, crime prevalence, BART (San Francisco and other commute), gentrification being some of the major drivers.

Looking at MLS listings many, many of the Oakland buildings are sold with rents at near 50% of market and I would never buy with a multiplier assuming I could raise building to market rent due to rent control restrictions. Banked rent and increased mortgage may help somewhat but there is also hard 30% limit over 5 years.  However, I might try to sell assuming market rents :-)

@Mel Selvidge will probably have more specific and valuable help.