Evaluate 8 unit complex

[Richard Stephens]

Need help on evaluating 8 unit complex in fort worth,tx. All units leased at $500 a month, which owner says low rents and will raise.Building was built in 1970 and doesn't look like any improvements have never been done since.Hes asking 390k ,appraisal district has it at 200k.I know the appraisal district is not accurate,but I think 390k is way to much.Shoot theres 1/2 acre identical vacant lot next door.Thought it would be cheaper to buy this lot and build 8-12 units from ground up. Any thoughts and opinions would be greatly appreciated,Thanks BP People

[Michael Le]

The appraisal district has nothing to do with it other than set how much taxes you will pay. The value of the house will strictly depend on the numbers. If his unit is leasing at $500/m then you need to be buying based on that and not on what he says he can raise it to. If it was so easy to do, why hasn't he done it already? You will also need to figure out the expenses on the property. Are the units separately metered? Is he currently paying for utilities?You will also need to know what the CAP rates are for that area. Talk to some local brokers.

But if your NOI number is right then his asking price of $390k would make this a 3.1% Cap. That would be way too much. Those are SF, Seattle, NY numbers I would think. Not a C-class property in Fort Worth. More likely it is 10% cap area which would put purchasing price at $120k, making it $15k a door, which would seem too low unless this is turn around.

Are you sure those NOI numbers are correct? They seem low. Which is better than the overly optimistic pro forma numbers people usually throw out. If the NOI truly is only $12k, then there is massive amounts of operating costs somewhere and you need to figure out where so you can see if you can lower it and increase that NOI number. The only problem is the seller is pricing as if the property is already turned around and stabilized.

Also, are you clear on what a cap rate is? Because you threw out 3 different numbers, including a negative number and that doesn't make any sense.