Off market cap rate question

[Nicholas J.]

I’ve come across a off market 12 unit apartment, for sale by owner. Sale price 660K. Current rent is 575/unit= 6,900/ month. Local market supports 625/month. Expenses are approximately 1,700/month. My question when trying to accurately calculate cap rate, I assume all expenses are to be included like cap ex and property management? Their expenses don’t include those. Also, when calculating income, I assume you only use current rental income, not 100% occupancy if a unit is vacant and not what rents “could” be? I want to nail down a true number and not something inflated. A lot of numbers I see on this property and other buildings are what the potential could be versus what is reality right now. In my mind, it’s only worth what it currently generates today, minus deferred maintenance issues. Thanks for the help!

[Bjorn Ahlblad]

@Nicholas Jestus at first blush those numbers-asking price and rent-look good; and I would look more. I can tell you flat out that 1700 is not the total expense. Normally I do not like dealing with FSBO because the owner is either hiding disclosures or is being unrealistic about price. Be that as it may just be extra thorough with the deal. I would ask for a rent roll, tax returns or financial statements and hand those to your accountant, and if you don't have one get one, if you want to be an investor. Call the city ask about the taxes, current and after the sale, ask about water and sewer, ask about the utility bill-verify everything. Tell the seller you are serious and need to do your homework, if you sense any reluctance simply walk away. If everything checks out get a proper inspection done by a licensed inspector. For a building like that expect to pay a thousand-a bargain by the way. Go with the inspector and enter each unit. If you can, meet some tenants. In order to get the cooperation from the owner you will very likely be asked to make an offer-do so subject to financials and inspection you can always adjust the numbers depending on what you discover. If the owner is for real he will admire your business like manner. If he balks move on.

You probably know all this stuff; but you asked, and I'm just responding.