What should I pay? 12 unit

[Calvin Beeke]

Hi, I am Calvin and this is my first post. I have 8ish years of experience with part time flipping, and bought my first property through my Dad while still in high school. I have full or partnered ownership in 22 rental units. I am currently evaluating a 12 unit. 

My question is this: Should I make the move to multi-family and what is this 12 unit worth? Also, what would you advise as to insurance as this would become my largest concentration of equity with a 25% down payment? 

The context: The owner has not stated a price, but has allowed me to look at the vacant units and said he was open to offers. The property is not publicly listed. Property exterior is in phenomenal shape. New Roof, boilers, laundry units. Carports. Units are all very similar with older kitchens and laminate flooring, most have had new carpet and paint with the last tenant turn. Most bathrooms are in good shape with slightly outdated look. 

The numbers: 

12 units (9 2 bed and 3 1 bed) $740 average rent for all units. I believe it to be 10% under market. 
Coil Laundry - $2,500 
Area is an A or B, suburb location within 20 minutes of Grand Rapids, MI. 

The Expenses: 

9% property management with 40% placement fee

Vacancy has been 12%, but I believe this to be an error of management and timing of leases. 

Taxes at $15,000 (potential of going up with transfer of ownership of course) 

$600 in electric costs 
$6000 in gas costs (radiant heat) 

$3000 in water costs 

$1800 in trash, lawn, snow removal

The loan, and the insurance (which will be decided by all of you as you will help me know what to offer!) 

Thanks for the help in advance guys! 

[Brent Neuenschwander]

Quick analysis:

Income: ~ $109,060 ($740 x 12 x 12 + $2,500)

Expenses: ~ $65,000 (taxes ~ $17k (be sure to check millage rates to get a better number), insurance ~ $3,500, vacancies ~ $9,000, property management ~ $14,000 (using 13%, might be slightly conservative), maintenance/repairs $10,900 (10%)). This does not include Capex which will affect cash flow below

Income - expenses: $109,060 - $76,000 = ~ $44,000 NOI

$44,000 NOI / your area's cap rate = price. I'm from Michigan but not too familiar with GR area, from the little I have looked at in that area it seems like most are ~ 7-8 Cap rate or even less. I have been picky and shoot for higher, 9-10 cap. But at an 8% rate, the price would be around $44k / .08 = $550k.

Research the area, what the going cap rate seems to be, you said it was an A/B area which would suggest a lower cap rate and higher price. Also, while you mentioned that the outside looked good, there were some possible renovations. Would need to factor that in to your analysis as well. The possibility to increase rents could be factored in with this as well, although I don't like the idea of paying more for the potential rents. If it were simply a matter of increasing rent, why hasn't the previous owner done it? It takes work, time, and money to do that.

To calculate cash flow, take your $44k NOI and subtract dyearly ebt payments and capex savings.

Hope this helps!