What would you pay for this property?

Question

I am looking to buy a small multi family in my area. I had this property sent to me by an agent that I am working with. He has all of the income and expenses but they haven’t determined a price yet. What would you pay for this property?

Annual income and expenses

Rent Income $50280

Laundry income $906

Vacancy $2514

Taxes $9008

Insurance $1430

Management $3017

Repairs $5028

Gas $572

Water $2391

Electric $562

Garbage $565

Lawn and snow $1980

Misc $325

Net $23,794

Thoughts?

Ed Matson · Answer

Assuming the income and expense numbers are correct (Some figures are clearly estimated as per cent of income, so go get the real actuals), you need to know the CAP rate for this geographic market and this class of property.  If the NOI is really $24K and the CAP is 6%, then the property could be worth about $400K.  But if its a lower quality property or in a lower quality area you will have a higher CAP rate.  At an 8 CAP this property is worth only $300K.  Also, does it have a substantial amount of CapEx required in the near term?  Lastly, regardless of prevailing CAP rate, what return on your capital do you need?  Will a 6 CAP meet your needs even if its appropriate for the market?  Just because a property is fairly valued doesn't mean its a good deal for me. I am later in my career and value cash flow over potential long term appreciation or mortgage pay down, so if I can't reasonably expect a property to perform at an 8 CAP, I'm not interested. If i were 40, I would probably think differently.

Ryan Parnow · Answer

@Bjorn Ahlblad I ended up closing on this for $290k. It is 4 two bedrooms and 4 one bedrooms. There is definitely some deferred maintenance but it seems like it’s going to be a good one.

Jorjio Hopkins · Answer

@Ryan Parnow

That’s great that you have this information. How many units is the property?

2-4 units will be priced based on comparables, while 5+ units will be priced based on the NOI/Cap rate.

You already have your NOI = $23,794

Now determine the cap rate. Hopefully it’s listed for the property, but if not you can find it a couple different ways.

- If you know the asking price then you can do (NOI / asking price) = cap rate

- If price is not listed then you can look on websites like LoopNet for active brokers in your general area with apartment listings and give them a call. Take this as an opportunity to start build a relationship with them (key for future business success) and casually work into the conversation ‘what’s the cap rate in this area?’

Take your NOI / Cap rate = Purchase Price

For example: If the cap rate is 5% then $23,794/0.05 = $475,880

This is what the property is worth, however, you should dive deeper to look for value add opportunities.

If there is any deferred maintenance or major capex items needing replacement soon then I would negotiate a slightly slower price, but also bring in enough capital and reserves to make the necessary repairs. Also look to see how the rents compare to market rents and if there is any way you could lower the expenses on the property over time. If so, then those are a couple signs of value add opportunities because you’ll be able to increase your NOI and force some appreciation on the property if it’s 5+ units.

Hope this helps!

Jason D. · Answer

@Ryan Parnow $237,940

Bjorn Ahlblad · Answer

@Ryan Parnow Ryan, Congratulations on closing the deal! Finding a decent MF in this market is a challenge! I sincerely wish you all the best!

Ryan Parnow · Answer

@Bjorn Ahlblad

Justin Kane · Answer

the fast equation is typically

Gross annual rents [t12] x 50% [vacancy and expenses] = noi [income before debt] / cap rate [local market rate] = value

Does the numbers work at that point then submit your Loi and begin your heavy due diligence process you should team up or partner with somebody that has more experience if you make a mistake on big deals it's a quick way to lose your shirt take it slow don't be desperate and you'll do just fine

Bjorn Ahlblad · Answer

@Ryan Parnow The broker is trying to interest you in a property that will be a tough sell because the current owner overpaid when he/she bought. The taxes are 9k in an area where property tax is 1.3 to 1.5% so likely 650-675. Rent is 4400/mo and nowhere near covering the investment. At laundry income it is a 6 unit or the tenants are dirty. That is going to be a struggle; I'm already on to the next one!

Matthew Baltzell · Answer

@Ryan Parnow I would ask the broker for the OM which will have the T12 and sales comps.

Look at the sales comps of similar properties surrounding the property. This will give you a clearer picture as to what the property is worth.

What would you pay for this property?

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