Big reduction in noi?

[Will G.]

Pocketeers, 

Looking at an 18 unit deal, 2016 had a noi of $72k and 2017 noi of $49k, due to lower gross rents and a bunch of needed cap ex on 3 of the units. How does one derive valuation with such different noi's?

What will the bank do to place a value, average those 2 years or?

[Michael Le]

You should back out the expenses that make sense to be one time capex, like flooring, cabinets, back splashes, light fixtures, etc. Ongoing R&M like paint can be left in expenses. The other 15 units you will have to estimate the rehab costs to bring them up the level you are comfortable with. $5700 per unit is really high though, so it seems like the current owner got shafted unless they put in granite and other high end features.

The difference in your accounting for it in your rehab vs you expenses is because expenses should be an ongoing thing and your capex will be a one time thing. Once you're done renovating you only have to account for the costs from your yearly replacement reserves. And of course the main reason is that it will affect the value of your property. If the current owner is willing to sell to you based on the inflated expenses that has CapEx in there, then it will only benefit you. But what you should be showing your bank is the real expenses.