12-Plex Purchase Formula

[Spencer Hoogveld]

Hello BP Community:

I have a question about a 12-plex apartment complex that I’m interested in -

The sellers are an older couple who are looking to get out of the rental business after 40 years. In total there are 12 units that are each 1 bed and 1 bath. Water, sewage, and electric are all separate. They have 6 of the units rented at only $300/each. These units are WAY under-rented! I ran a report on rentometer and the median rent for the area is around $500. The other 6 units are vacant, but could easily be rented with some cleaning and minor updates.

The sellers are asking $455,000. This number seems extremely high when the building only generates $1,800/year in current rental income. While the units are functional, they all need to be updated to be able to generate $450-$500 in rent per month. I’m estimating about $75,000 in updates to renovate all units and modernize the exterior.

My question is: What formula can I use to show the sellers what the building is worth based on their current income?

I don’t want to be disrespectful by offering a low number, but also want to be fair so the numbers work for me.