Questions on evaluating multi-family

[Courtney M.]

Hi, I happened to see a multifamily property come up in my husband's old neighborhood. I find it intriguing for a couple of reasons and wanted some input on how you would go about evaluating a deal like this.

It's essentially 5 duplexes at $776,000. The listing notes the owner will finance on a land contract over 20 years with $100k down. The listing also specifically states he doesn't want a realtor/broker.

Per the listing, gross rent is at about $98,000. He lists the expenses for the new owner in year one, which includes mortgage payment, insurance and property taxes at about $57,000. Of course that number doesn't account for property management or opex. There are 5 roofs, after all, and the properties were built in 1995. The project is currently 100% leased (rates per unit are not listed). Cap rate on the listing is 8.73%. I will be in the area in a few weeks so I was thinking of going to take a look.

In this scenario, with the limited information, how would you evaluate this deal and structure an offer? Running some quick math, it looks like each unit is renting at $823ish. Quickly running searches on Zillow, this looks to be about right, maybe just slightly under. Listing also notes tenants are paying all utilities and all have a washer/dryer in unit.

With this limited information, is this a "deal" you would be interested in? What would be your process? I've never even put in an offer on multifamily, let alone one without a broker, so I'm trying to figure out what the initial steps might be to better qualify this deal.

Of note - this isn't a growing population area. It's more of a smaller rural area but as a result, there aren't a lot of rental properties on the market. It's definitely another area I'd want to dig into before going further.

[Sam Grooms]

The cap rate of 8.73% implies NOI of $67,745. On GPR of $98,000, OpEx would be $30,255. That's 31% of topline. If you don't have a T12, I would assume OpEx to be 50% minimum. That bumps your trailing cap rate down to 6.31%.

With NOI of $49,000, is that enough to pay your mortgage/land lease? (Note that insurance and property taxes are included in OpEx). How much is left over after you pay the mortgage? Take that cash flow and divide it by your $100K down payment (plus any improvements you want to make), and that will be your very basic cash on cash return.

I would also take out additional CapEx reserves from my cash flow, similar to what you'd have if you were bank financing.