15 unit deal help

[Michael H.]

This would be my 1st multi unit deal. I put a post on Craigslist to find an off market deal and was contacted by a guy with a 15 unit for sale. I did a small walk through and have a general idea of the condition of the property. I haven't seen all of the units yet as they're tenant occupied. 2 units are being remodeled and vacant. He said he has a 3% vacancy rate I asked the gentleman how he arrived at the selling cost of $750,000. He replied that he came up with the value based on that is the # that makes it a 10% cap rate. It is technically cash flowing well with about $3500 a month after P&I, vacancy, maintenance, insurance, management, taxes, and insurance. The issue I'm having is the gentleman has owned the property for 16 years and appears to have put very little time or money back into it. 
At a very rough guess I'd say it needs $40-50k and possibly more in various repairs like water heaters, general plumbing, hvac, paint, windows, etc. How does the fact he's banked cap ex for 16 years effect an expected cap rate /value? I'm not sure the rents could go up much higher for what they are either. There does seem to be some value add with an unfinished unit that could be completed, laundry possibilities, and storage units. Is there a good equation to use to calculate this to substantiate any offer? What am I missing? The units are in a b /b- residential area with no other apartments around. Thank you for any feedback you can help me with. Michael

[Philip E.]

@Michael H.

Free marketing channels are great!

Based on what you’ve shared, doesn’t appear the seller provided a definitive reasoning how he arrived at his numbers. …If I were in your shoes I would start with:

1. Find out gross rents (..Seems you may have this number already)
2. Determine All annual expenses (…sometimes I do a back of the napkin calculation for about 55%)
3. Research cap rates for that sub-market area.  Contact local broker to see what cap rates commercial properties are trading as in that area.
4. Determine the NOI : annual gross rents - annual expenses = NOI
5. Calculate the approx. market value: NOI / cap-rate (if market cap rate is 5.5%, then the you do NOI / .055)
6. This is all preliminary; However the number you arrive with in number 5 would help me gauge if this is worth looking into further and exploring if there there is value add opportunity based on:
  a. Local market rents
  b. Condition of property
  c. Misc. micro-economic variables impacting that area (casino being built, government agency transitioning into the area, etc.)
  d. Anything else I overlooked during this 2minute brainstorm.. :-/

Also these guys have always contributed great in depth advise on how to approach these opportunities:

@Ben Leybovich

@Serge Shukhat

@Brian Burke

…My two cents, Happy hunting!