How to Value Multifamily with NOI as Moving Target?

Question

Hey -- I'm keeping my SFR/Duplex buy and hold portfolio and heading into out-of-state multifamily, so I'm still trying to grasp various elements. I'm looking at a property now that has been mis-managed by some adult siblings, who received the building after their parents' death several years ago. The more responsible siblings have even more recently taken over management from the less responsible siblings, as they try to bring things back into order after a rough couple years.

They've provided me some initial number that cover their year until Nov 30, 2017. Based on that, there's a very, very low NOI (again -- poor management). Now, I haven't gotten any numbers from the last 6 months, but based on some conversations -- it's likely that an even more current snapshot of their NOI would prove to be better.

So my question is -- what's the typical approach for arriving at a possible purchase value -- as it relates specifically to capturing the NOI in time, especially if it seems to be changing somewhat rapidly? TIA!

Matt Popilek · Answer

@Brian Kraft - I think the cap rate you purchase at is significantly just your method.  I think you have to come up with the % that makes most sense to you, and be willing to adjust if you have a really good opportunity come your way.  I never say never!

Matt Popilek · Answer

@Brian Kraft depending on age I use 50% to 55% on total cost to gross rent that is my rough in number. Then based on what type of renovation work I can work that number back down to 40% if everything will be new.

Michael Le · Answer

Generally the T3 is the best indicator of trend and your lender will put most weight on those numbers. Why don't you have the last 6 months of numbers?

Account Closed · Answer

I would push to get the last 6 months of financial data from the current owner. I assume you plan to leverage the property. If so, your lender will require this information, especially the trailing 3-6 months.

Everyone's strategy is different, but personally I do not like pricing in the value add. I would go strictly by the actuals to arrive at a purchase price. Think of it this way... It is hard to justify paying for something that is not there. In my mind, if the owner wants you to pay for the value add, they should take the time and effort to raise the income of the property accordingly. Realistically, competition seems to work its way around my first statement in a hot market cycle.

Regardless, before determining a purchase value, I would suggest determining your investment performance criteria. What stabilized cash on cash return do you expect to see? How much would you need to invest to achieve your value add target? etc, etc. Using these numbers you can arrive at your strike price.

Brian Kraft · Answer

Thanks for all the input. It sounds like I'm more or less headed in the right direction -- and I always appreciate all the guidance and invaluable little tidbits.

@Joel Owens -- great question -- it's not been my plan, but it's important to know what's possible on the land, so I will know those details here shortly.

@Todd Dexheimer - A T3 4 cap wasn't an approach I was familiar with, but I get it. So, I assume that'd be the same as saying you're aiming at 16 purchase caps or higher (while using the most accurate data you have)? While @Matt Popilek said 12 cap or higher. I imagine it's based on your individual tolerances/the specifics of the deal, but is there a rather standard purchase cap rate "rule," a la 70% ARV, etc? I've been somewhat familiar with market cap rates, but the purchase cap rate is a more recent variable for me, that I need to get a better handle on.

Todd Dexheimer · Answer

Get the T-6 and then look closely at the last few months. You also may need to do some projections as well. If you can buy it at a current T-3 4 cap and within 12 months raise rents and collections it may be worth doing. Look at market comps, vacancy rates, etc. It may be wise to hire a MF broker to represent you and advise you. Have them sign an agreement first that they are representing you.

Joel Owens · Answer

How much land is it on? What is current use versus highest and best? What is density allowance with air rights?

There might be  a play for scraping the building and doing something new if location is good.

Brian Kraft · Answer

Thank you both for the additional input.

Matt Popilek -- curious if you use a certain default percent for maintenance and vacancy when analyzing to account for the higher-than-expected? I've seen some guidelines, but curious what you think is realistic.

How to Value Multifamily with NOI as Moving Target?

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