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Updated over 5 years ago on . Most recent reply

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Sergio Ramirez
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How to calculate an offer on a multifamily building?

Sergio Ramirez
Posted

I have a landlord who wants to sell his building for $1M. I have seen similar multi-families in the area go for $875,000 - $1M. I watched a video on Youtube from Jerry Norton on this. In his video he states in order to calculate an offer you must focus on Net Operating Income instead of Comparables like you would for a regular house. I did an example deal from a different property where I was able to get the financials and rent roll to plug in the numbers in the formula provided by him in the video. I followed step by step and there was no guess work since the numbers where right there. Long story short the seller for that building wanted $10M and my MAO was roughly $225,000??? I know something is missing in the formula. The landlord who wants $1M for his property is motivated to sell but I just need to know how to calculate my offer. What information do I need and what formula is used to calculate this?

Most Popular Reply

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Bruce Petersen
  • Rental Property Investor
  • Austin, TX
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Bruce Petersen
  • Rental Property Investor
  • Austin, TX
Replied

@Sergio Ramirez

As @Greg Dickerson said, it's about NOI. You need to know the operating income and operating expenses (subtract expenses from income) to get NOI.

Next you need to decide what return YOU need on your money if you were to buy it all cash with no loan. If the required return is 6% then you take your NOI and divide by your required return of 6%, also referred to as you CAP rate. This gives you the value of the property to you.

Sellers will often times try to tell you how their NOI is way too low because of a number of factors and that once you take over you be able to drive the profitability (NOI) up which "of course" will support his much higher expectation on sales price.

Be careful with this as it's almost never the case. I would offer on current operations and not assume you can make the improvements he is suggesting especially on a first deal.

All of this being said, it wouldn't surprise me at all if he has no real financials on the property. If that's the case well now you have a totally new new issue to work through, how to build a budget of expected income and expenses.

Good luck but please be careful and try to find an experienced and successful actual human being as a guide or mentor to walk you through this. 

Youtube is great for how to change you spark plugs but usually isn't enough for buying an apartment with no experience. 

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