Multi Family Analysis

[Jason Rosenbaum]

Hi BP,

I wanted to get some insight on analyzing a multi family deal. If I were to purchase an 8 unit property with a few current vacancies, but all are rent ready, is there a rule of thumb on how much the value of the property I should consider?

For example:

Scenario 1: An 8 unit property has a total rent roll at market rent fully occupied of $100,000. There are currently 4 vacancies making the actual rent roll $50,000. Obviously the seller wouldn't sell for half price just because the units are vacant. What gross income would you evaluate the property at assuming no upgrades need to be made to the units? Would there be some middle ground?

Scenario 2: This leads into my next question. If the same property has a current rent roll below market rent and is fully occupied. The rent roll is now $70,000. Assuming no upgrades to the units need to be made, and let's say the current rent roll for all leases ends in 6 months and than I can bump it up to $100,000 at zero cost (obviously hypothetical). Is there a general middle ground of gross income I should be evaluating a property at? In this scenario, I would have a total gross income for the year at $85,000. Would I than evaluate it at exactly $85,000? Or is there some middle ground that I would evaluate due to future gains and future value, so I can potentially evaluate the property at $90K or $95K which will account for my work of getting the rents up to market?

Scenario 3: Than my last question would be adding that next variable in, cost to upgrade to get to market rent. How would one factor in a projected cost to upgrade to market rent? Would you subtract the project cost straight from your purchase price? Or again, is there a middle ground that you would typically evaluate the property at for future value?

I know this is a lot, but any insight would be appreciated!

Thank you

[Anthony Dooley]

Base the value on the actual rent that the property currently produces. If it could produce $100K, then why isn't it? I would not pay for value that is not actually there in hopes that it would appear later. If you are going to make improvements to try and add value, you would do that with one of the vacant units and try an increase in that unit. If it stays vacant, you only spent money on one unit. If it rents out quickly for more rent, then do that to all of your vacant units.