Estimating ARV on 5 plex

[Ben Baye]

I am looking at a 5 plex in a small town in northern wi. The deal is:

5 - 2 bed 1 bath units renting at $500/ unit at full occupancy currently with month to month leases. Asking price is $100,000. Some tenants have lived there for near 30 years. Based on pictures I can't see any major renovations needed but I'm confident it needs something at this price. My lender will do 80% of purchase and 100% rehab then refinance at 70% ARV with a 20 year note at 6%.

I’m considering trying to do 1 year of owner financing and covering the rehab then doing refi. I would like to hold it 2 years, up the rent to current rates of $600-$650 then sell it. 

I am not experienced in determining ARV on a commercial property like this. And given there aren't many comps how would I evaluate this property?

Thanks for the help!

[Sonu W.]

Looks like you need to do some research on NOI and how it dictates property values. Watch some videos on youtube and it should give you a decent foundation to build on.

Here's a quick use case with some easy numbers:

10 unit property - Purchase price $1,000,000

Annual income = 10 units x $1000/unit/month x 12 months = $120,000

Using 50% rule - Expenses = $120,000 x 50% = $60,000

NOI = $120,000 - $60,000 = $60,000

Property was purchased at a 6% cap rate ($60,000 NOI / $1,000,000 PP)

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Value Add:
Increase Rents by $50/unit/month:

Annual income = 10 units x $1050/unit/month x 12 months = $126,000

Decrease expenses by 10%  - Expenses = $60,000 - 10% ($6,000) = $54,000.

NOI: $126,000 - $54,000 = $72,000

Assuming market cap remains at 6%

New Value: NOI ($72,000) / Cap Rate (.06) = $1,200,000