What would you pay based on these numbers.

Question

Hi guys,

I've been looking into buying my first multi-family. This property is a 6unit. Without revealing the price, I'd like to know what the investors on this forum are willing to pay based on the numbers.  I'm sure a lot of you have a general rule of thumb based on the income so I think that might help me make a decision.

Here it is:

Total Income $5,246 X 12 = $62,952

Separate Utilities

Approximate Annual Expenses:
Taxes: $9,829	
Water $2,596
Insurance $3,030
Electric $463

Total Expenses $15,918

Gross Income -- Expenses = Approximate Net income $47,034

This is obviously based on the assumption that I pay cash and not borrow money, so what is a good starting point to make an offer?

Jon Holdman · Answer

You've missed a BUNCH of expenses including vacancy, capital (you'll eventually need a new roof, for example), routine maintenance and property management, just to name a few.  With $63K a year in gross (scheduled, I assume) income, a better estimate of NOI is $31,500.

What ROI do you want on your money?  At 10%, you could pay $315K.  At 20% you could pay $157K.  Subtract immediate rehab expenses from those numbers.

If you do finance part of it, your ROI will generally be higher. If you know the potential loan terms, you can include these and calculate a price.

Bryan Hancock · Answer

What is the NOI for the lowest sold comp?

You shouldn't value 6 units like you do 4 units.  They are financed differently.

Read the Ray Alcorn article I posted above.  With that article and some lender's terms for a loan you should be able to arrive at a price.  Even if you can pay cash you need to know what the financing costs to price your bid correctly because your exit buyer will likely need to finance the purchase.

Jon Holdman · Answer

No, I didn't mean you can afford to pay more with financing.  A deal's a deal regardless of how you pay for it.  I did mean that, everything else being equal, you can generally get a higher ROI with financing than with paying cash.

I think 6 unit buildings are a no-man's land.  They're over four units, so no conventional financing.  They're too small to get good economies of scale.  They're hard to financing because the loan balance is small.

J Scott · Answer

As Jon stated, unless you have more detailed numbers, assuming that half your income goes to expenses is a reasonable estimate.  So, at $300K purchase, you'd be earning about 11% on your investment if you hired out the property management.  Personally, I'd want a better return, and would offer closer to $150-175K.

Capex is "capital expense" and refers to the bigger repairs that you'll have to make every several years -- like replacing the roof, replacing the HVAC system, replacing the water heater, etc.

Joel Owens · Answer

What age is the building??

You don't have management fee in there,vacancy and eviction costs,your operating and expenses estimate is low,you have not set aside reserves for ongoing repairs and marketing.

You have no CAPEX going in for deferred maintenance needed going in right away for the property.

When a seller shows numbers like you posted above they are leaving expenses out or they have cut corners over the years with deferred maintenance to show that kind of return.

You are the one that will be stuck with the problem and overpay.

You didn't mention rent per unit.Is it 100% occupied??

At 100% occupied you have rent of 874.33 per unit.

Take 62,952 verified by schedule E tax returns and by checking bank deposits then half you get 31,296.

At a 10 cap going in that is 310,296 sales price before CAPEX. needed.

There are too many variables not posted by you to give an exact number.

Lafi S. · Answer

The lowest sold comp is for 280k in the last 6 months on 6 unit apartments in the area.

With those additional expenses and the NOI closer to 30k I think it's fair to say that an offer of $235k is a good starting point? Or should I just lowball them at 150k like JScott said and see how it goes?

Bryan Hancock · Answer

The market for 4 units and the market for 6 units are very different and they are valued differently.  I know that this is completely stupid, but it is what it is.

Financing for the 6 unit at that price is going to be less favorable than it will be for a 4 unit.  The loan constant will be higher and thus YOUR bid will be lower.

Lafi S. · Answer

Bryan, there's a lot of demand for investment properties in this area.

I had another 4 unit plus store front sell for 325k and it was only bringing in around $4,400 in gross rent fully occupied.

So it's tough, the only advantage I have is being the one negotiating directly with the bank and not competing with other buyer's.

Bryan Hancock · Answer

Another issue you are going to run into is the the property is hard to finance.  6 units equals a commercial mortgage so your loan constant is going to be higher than it would be with 4 units.  The bank's yield requirements are higher and thus you won't be able to bid as much.

Ray Alcorn has a great article on how to get pretty close:

Google search for Alcorn's article

Study that article CAREFULLY and use his procedure.  That will get you within 10% or so.  You can then round down and use some judgment to come up with a final bid.

Bryan Hancock · Answer

Where is the property located?  What are investors paying for income streams in the area?  In other words....what is a good estimate of a "market capitalization rate?"

What would you pay based on these numbers.

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