Need Help Analyzing a 56 Unit Deal

[Jal Singh]

Greetings BP!

I am working on a multifamily deal, but the numbers don't make sense to me. I would really appreciate a second (or third or fourth!!) pair of eyes. Please see the link to the T12 below. The NOI I am calculating doesn't seem right. I have a total net income at $304k (allowing for some vacancy here), but the expenses seem a bit excessive at $247k. The management fees look pretty high. This gives us a $57k NOI, am I off base here?

More info on property from the broker summary:
Units: 56
Price: $1,600,000 ($28,000/unit)
Cap rate: 7%

Dec 2015 T12

Any help with this is much appreciated, and thanks in advance for your time!!!

[David Alvarado]

Something is going on in the financials. They need to be broken down and torn apart to realize how the property should operate moving forward. Before you completely dismiss it, I'd ask the broker to have the sellers provide you with some historicals - you'll typically want to see three years - 2014, 2015, and TTM at least.

The economic and actual vacancy look a little light compared to what I think you should underwrite at. I don't know your market, but I would do some research there to get comfortable with what you can expect moving forward. Bad debt can be around 1% - 5% depending on the location and class of property. Vacancy can vary as well by market. Next, you shouldn't include income from interest - ~$30 in the sheet. The other income line items look fine.

The expenses also need some cleaning up. Do not include the interest paid out, that does not get factored in when calculating value using a cap rate. Some of the maintenance and repairs, specifically the HVAC expenses look a little high and may have been one time costs that they are not allocating correctly - should've been capex if that was the case. Worth a question if you're serious.

Also, as someone mentioned their payroll looks excessive and for 56 units you may not require two people on site depending on the condition of the property. I'd say, one full time and the other part time for maintenance should be sufficient. I typically account for 2 full time persons for around 100 units. Overall the expenses are $4,400/unit based on the TTM figures, which is a bit on the high side for what I'd consider an efficiently operated property. I've seen near this figure and it was realistic but I think it is worth getting more information on before you draw any conclusions. Typically multifamily operating expenses can vary anywhere from $3,600 - $4,400 a unit - this is for quick scrub purposes and you should always run through your own underwriting before making an offer. 

I backed out the interest income and expenses and came to a value of just over $1.1M based on a  7% cap rate. With a better understanding of how its being operated this may or may not be a good deal.

Hope this helps!