Evaluating 100% vacant multi-family property

[James McCloskey]

Hi all!

I'm looking for advice on how to evaluate a 100% vacant multifamily property. There are currently no tenants but looking to fill 10 units. The building has recently been completely gutted and renovated, and why it is currently 100% unoccupied.

Our previous deals/ offers have been on active properties with prior year actuals to analyze to help formulate an offer based on NOI so this approach is unfamiliar for us.

Some additional background:

- Current owners have had the units listed on the usual third party sites for a few weeks. There has been interest but no applications, as it appears to be overpriced by around $100 (I suspect with the strategy of starting asking rents high, and then coming down as required). It's in a developing area, so $100 is a big deal.

- It's in a stable MSA and our belief is at the right asking price the units will fill, but it's hard to forecast how long it will take to fill with tenants that meet our (reasonable) criteria and the correct asking rent.

- We've spoken to some local PMs who share the belief it will fill within 2-3 months, but it's a matter of time, and landing on the right price.

- The building is 10 small studios/1 bedrooms (~450 sf)

Any guidance on how to evaluate something like this? The risk is in the unknown timing to get to 100% occupancy and potential variance between expected rent and actuals once filled.

Is the right approach to create our own pro forma using conservative unit rents, expected expenses, and then a best guess at how long it will take to fill 100% and apply that average vacancy to the units to land on a forecast NOI? Can we then use an elevated cap rate to price in some of the risk of the project? Typical cap rates for this area/asset class are around 8%.

Thanks in advance for any insight or help!

James