Multifamily CAP exercise.

[Michael Randle]

Hello everybody,

The following is all theory and I am putting it out there for the community to correct my process not exactly the numbers.

I am doing my homework and trying to analyze 5 deals a day. Working on getting up to speed on multifamily. So obviously this involves CAP rates and unfortunately not a lot of deals that can be found on public search engines.

I did manage to track down a property in my old town of Phoenix AZ and figured it would be good to try and see what a good offer on it would be.

NOI = ~$45k (pro forma)

CAP = 4.11% (C class property)

Asking = $1,100,000

10-Unit.

I managed to see a few places to increase NOI, get it up to ~$55k.

Now I want to make an offer on this property but I do not know if the CAP rate is accurate.

I google and call brokers and it seems like class C properties are going for 5.5% cap in reality!

So in order to make a actual offer I would make an offer of NOI=$45k with a 5.5% cap rate. Therefore the counter offer is ~$818K.

I understand that in reality I would probably be closer to CAP rate of 6.2% and instead of using PRO FORMA rates I would use actual rates, and I would look at actual NOI. But besides that does my theory hold up on to how to evaluate and make a counter offer on a property?