Strike Price for Multifamily Properties

[Alejandro Antonio Taylor JR]

Hey guys hope this reaches all of you well and you're all staying safe during these times. I am currently finalizing my business plan for my Multifamily real estate investment business I am planning with my Dad. We are planning on investing in large apartment buildings in Florida and Texas. One question I had is what is the best strike price you should look to offer a seller when purchasing a Multifamily property? I know the value of the property is the NOI divided by the cap rate. I figured it would be around that range. I have seen examples where buyers offer much less that that value and end up getting their offer accepted and closing on a deal. An example would be a buyer found the value of a property to be $5 million and he ended up offering $3.8 million and closing on the deal. Thanks in advance for any help guys. Best regards.

Tony

[Enrique Huerta]

@Alejandro Antonio Taylor JR, Congrats to you and your dad on your new endeavor! We are in interesting times so I salute you for your courage and willingness to move ahead despite the market turbulence. If you have any questions along the way, I'd love to connect and talk through some of your challenges!

Your question is extremely loaded and there is no "one-size-fits-all" answer. In general, I would say that a seller's asking price is just that, their asking price. Everyone's motivation is different so there is no guaranteed formula to get a $5M deal for $3.8M. The reality is that everyone solves for different returns and YOU have to decide what returns you and your dad are looking for. A $5M deal will attract offers in a wide range from $3.5M to over $5M.

With that said, stories of "good deals" are just stories without any context or numbers to back up the stories. Those stories are typically indicative of good timing and a motivated seller. The only way to find those is to be in the market every single day speaking with brokers, lenders, and owners.

I would encourage you to discuss with your dad what returns would be suitable for YOU. Look at various investment return metrics and choose the best mix for your goals. IRR, Equity Multiple, Cash-on-Cash Return, Annual Average Return, Stabilized Yield on Cost, Proceeds Per Unit, etc. And then make an offer based on the price that meets your goals.

For example, if the $5M deal didn't meet my hurdles, I would lower the price on my financial analysis until I "back into" a price that meets my investment return goals.

What are you goals? Cash Flow, Appreciation, Growth, Steady Returns? How hard do you want to work to get returns? Are you okay buying a small return? Or do you want to "Manufacture" a high return?