Which approach are you using to Evaluate Multifamily?

Question

Hello BP,

My background....I have an 8-plex, 4 plex, and two duplex properties. Looking to scale so......

There is a 20 unit multi listed for $945k. It's been on the market for 2 years. I requested the rent history P&Ls etc.

I did a walk through with the property manager and sat down with the property owner.

I ran several scenarios using a deal analyzer spreadsheet.  Used current rents, projected rents etc. Pulled actual taxes history, and got an insurance quote so my numbers would be as close to reality as possible.

I pulled up as many sales as I could find in the area going back 2 years for similar units (2 bedroom/1 bath) and found average price is $37,500 per unit.

My scenarios with the deal analyzer show a price range of $649k (10 CAP) to $812k (8 CAP) and that's using current rent w/ what my expenses would be. Given the deferred maintenance, and current rent amounts I offered $750k, which also happens to fall in line with the area per unit average.

The owner's response was you can't build a 2 bedroom for $37,500 per unit.

So are we using what it cost to build the building in today's $ or what the value of the current income is to place a value?

Your thoughts please.....

Doug Crenshaw · Answer

You did everything correctly! You have to get your numbers together, and it seems like you got the right numbers to look at, to make a viable offer. Don't let what one owner says defeat you! There are some I have looked at that were at 4% Cap and I reran the numbers to make sense for my investor and I had to say it was half of what the owner was asking. Just keep in mind that you have to offer what makes sense for you. Sometimes these owners get themselves upside down and then want someone else to buy their problems... don't fall for it. You are better off not getting a property than to buy it wrong to start off! You are running a business (yours) and if it doesn't make sense to the owner... who cares... don't take what they say personally. One of the biggest mistakes I see investors make is to either second guess their numbers and go with the "other sides" number or "feel bad" for the owner's situation and give in to them. Keep it as a business and you will do fine! Just keep being diligent in getting your numbers together and if they don't like your offer they don't have to take it... just don't take it personally... and move on to the next one! Hope that helps!

Carl Millsap · Answer

@Bjorn Ahlblad thanks for the reply.

@Peter Nikic and @Jamie Heath I'm from Syracuse, but the subject property is out of state. Syracuse is 100% about cash flow, not much appreciation to be gained.

Ryan Daigle · Answer

@Carl Millsap That's just a negotiating tactic. Tell him if you were to build a new 20-unit it would be in a lot better condition than his/hers and would command a much higher rent. So that's an apples to oranges comparison. Plus construction cost is a sunk cost - it doesn't factor in once the property is fully stabilized and rented out.

Also, the fact that this has been on the market for 2 years tells you this is not a rational seller. Doesn't mean you can't try and make something happen, especially now, but you shouldn't be surprised when you get a response like that.

Stick to your guns and good luck!

Eric Johnson · Answer

Hey Carl, you always need to buy based on the as-is asset. You will be the one taking the risk by buying it and repairing it, correct? The property being on the market for two years speaks for itself to me. They have analyzed the property wrong. I would offer what the going cap rate is in the area and factor in a 50% expense ratio. Brokers and sellers tend to understate expenses. Sounds like you were on the right path to begin with. 945k asking is too high for sure.

Carl Millsap · Answer

@Eric Bergin thanks for the consideration.

Eric Bergin · Answer

@Todd Dexheimer @Carl Millsap I would be happy to run a costar report for you for the property to let you know the comps/demographics/etc.  usually those reports are 100+ pages and then you can dump the sale/lease comps into your financial model directly if it is set up for that.  I use models from tsmfinancialmodels.com and I just export out of costar and paste into the model and it updates automatically...then I just need to make sure I am comfortable with the costar comps.

Carl Millsap · Answer

@Todd Dexheimer I was given 10% as the prevailing rate for this particular area, but it seems multi owners are using a different criteria altogether.

I'm using a +/- range of the prevailing rate to see if I can get a deal that works and not overpay.

I looked at a 32 unit, met with the owner and his ask is $300K more than revenue justifies.

We factored in that his net income is low for 2 years because he did a lot of renovations and made some CAPEX upgrades so I adjusted our numbers to account for that but even on 2019 #s alone at 100% occupancy we can't get to his ask, and he doesn't appear ready to lower his expectation.

So on to the next one.....

Jamie Heath · Answer

Carl, sounds like you projected it pretty well and that's certainly a fair per unit price in Syracuse. (especially if it's located within the city limits). Syracuse is about cash flow, appreciation is a bonus. Good luck!

Peter Nikic · Answer

Personally, I look at it one of two ways:

1. Will I make (more) money on a monthly basis even though the property values don't appreciate much?

2. Will I make (less) money on a monthly basis but the property will have significant potential to increase in value?

Basically you should be making money monthly or at some point in the future.

As far as seller saying you can't build for $37k - there is a good point to this, and I agree with it. It means you can have higher profit margins even though your housing may not command higher rents and may need more repairs.

A significantly lower cost allows you both to charge lower rent, spend more on repairs and still get higher returns than a newly built property. My guess is that this property could be my #1 example where you can make a good monthly income from this property if you buy it at a good price. I don't envision Syracuse RE value going sky high (usually this is only in larger cities like Manhattan or up and coming cities and waterfronts).

Good luck.

Todd Dexheimer · Answer

A seller that has that response, either doesn't want to sell or is just in denial. The building value is based on income, not on cost to build. Show this guy the numbers you used to come up with a value and if he still sticks firm to his number, then walk.

One question: What is the prevailing cap rate in the submarket? You can obtain that through a CoStar or similar report or through a local brokerage.

Which approach are you using to Evaluate Multifamily?

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