Trying to grow into Multi-Family

[Shawn Singh]

Hello everyone,

I am an investor and current have a portfolio of 3 residential properties (1-4 unit) that I have purchased leveraging the BRRRR strategy. They have been successful thus far, however I have been looking to accelerate my growth by focusing my efforts on larger multi family properties.

My agent brought the following property to me as a value add deal - I've been trying to run the numbers, however I'm not sure if there is something I am either missing, or maybe I am correct and this deal just doesn't work.

8 units

Asking: $850k

Gross Income: $97k

NOI: $52k

Cap Rate: ~6%

I believe that after updating kitchens / bath / flooring (assuming $12-14k per unit, at total of $100k), we can raise rents for a projected rent roll of $113k, resulting in an NOI of $69k (assuming expenses don't increase).

Now, with those numbers, I thought this should have been a good deal, however after running numbers at 25% down (for both purchase and post rehab refinance at a 6 cap), I'm resulting in cash flow numbers that are below $500.

Can someone review the above info and tell me if there's something that I'm missing when it comes to running numbers?  It's my first time venturing into the commercial multi-family space (5+ unit), so genuinely not sure if I'm even running the numbers correctly. 

Thanks for the help in advance!

[Chase Louderback]

This could be a "deal" depending on the area (i.e. if a 6% cap price should be a 4% cap). That being said, I would pass.  @Greg Scully's numbers look accurate for what you should expect and buying an 8 unit at a 6% cap is crazy to me - unless there is massive upside, in which case the cap rate is pointless.  Smaller units like that generally run less efficiently and have higher risk (1 vacant unit is 12.5% vacancy rate) and should therefore have a higher cap rate.  

Also, 12k-14k isn't a cheap lift. This may take you most of the year to complete and lease out due to the current leases, like Greg stated. Finally, be sure to go through the expenses and make sure they aren't leaving anything out. How they claim to be running the property and how it will run under your management are two completely different things. Definitely make sure that maintenance and capex is on top. Those ARE real expenses that are going to effect your NOI and therefore cash flow.

You can also ask the what the market cap rate is for similar properties of size and vintage and if the seller has any flexibility in the price.