Evaluating an empty multifamily
Investor · Covina, CA · Member since 2012 · 28 posts · 3 votes
Evaluating an empty multifamily
12 Replies
- Altus, OK · Member since 2008 · 2k+ posts · 690 votes13y
First it's going to be very hard to determine the value of a MF property without income coming in since the value of multi's(5 or more units)is dependent of the income generated and not so much by comps.
On top of that you're not going to get much financing if not at all if this isn't producing so you're going to end up paying all cash.
The risk is very high if there is no income coming in. If you can handle a cash bleed every month while you fix up the property and start getting tenants in than it might be worth it overall but that's if you can handle it.
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes13y
The best way to do it is figure what cap rate you want when it is stabilized. Then figure how long it will take to get it stabilized and how much it will cost. once you have that figured work backwards.
Example. Lets say a building has some tenants but will take a year to get stabilized.
The value of the building stabilized
plus any rents you will get until stabilization
minus one year carrying costs to get there
minus the costs to upgrade and renovate
minus the opportunity cost of money needed to get there
minus any additional profit for the risk taken.
equals today's price.This is not an easy of fun calculation to do. To do it well requires more knowledge and experience than I have. Good luck - Ned
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes13y
Hi Lorene,
Apples and Oranges here.
Can't compare a totally vacant apartment building with a semi-performing one. Different dynamics at play and different problems to deal with in the decline of a property.
Totally vacant has to be purchased at a much less price per door than occupied and paying. Now the highest and best use might not even be to turn around the property. The land and location might dictate a better use. If you have say 80 units and when it was built it is so old that density allowed per acres was much less then it's probably sitting on a good chunk of land.
If that's the case on the same land with the new density laws you might can put 200 units on it. If that's the case and demand is there it makes sense to demolish and build new instead of dealing with lead based paint and everything else under the sun reviving an old dead property.
Most properties that are totally vacant are thrashed in bad areas. The reason is good properties in good areas when they reach trouble around under 70% occupancy someone will swoop in and buy before they go vacant all the way.
- Investor · Covina, CA · Member since 2012 · 28 posts · 3 votes13y
Thank you all for your responses. Ned Carey thank you that is what I was kind of looking for some kind of formula. Joel Owens its a smaller prop, built in 1960, 2 separate buildings with 10 units on each side, on .36 acre of land. I believe this to be the highest and best use, but how would I be sure of that?
It is thrashed but the area is fair, its a military town, the vacancy rate is 5% and renters make up abt 45%. Apts three streets down have less than 5% vacancy according to the manager but it has twice as many units and 20 years newer.
But assuming it is the highest and best use, with no room to add any units, what would I do different in valuing it?
Thanks again.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes13y
You have to first determine WHY the property went vacant?? Mismanagement, not making repairs, the area changed, over saturation of newer apartment buildings with amenities, etc.
When repositioning you have to know these things to determine what to do with a property. A property from 1960 will have many issues. If the units are totally crushed then the city or county may require sprinkler systems, etc. When a property loses it's grandfather status there is no telling how much the city or county will require.
Is the plumbing still intact and electrical??
I would say much higher than a 6 for that type of property.
It would go like this.
Say 20 units once rehabbed you want to lease up fast and take away the good tenants from other buildings to get yours performing. So when you base expected rent the first year you want to go under market. If others are leasing up at 600 a month for that product that is newer you want 500 for the first year for your rehab.
Take 500 rent by 20 = 10,000 a month expected gross rent.
Landlord utility use .60 costs. So 10,000 X 12 months = 120,000
120,000 X .40 = 48,000 NOI (net operating income)
Say for a decent area of California this would resale for an 8 cap pretty fast. At an 8 cap resale is 600,000
Take 600,000 minus 6% commission = 36,000
Also factor 20k in closing costs and legal for resale600k - 56,000 = 544,000
If the units are totally stripped rehab varies by area with parts and labor but figure if windows, roof, mechanicals, parking lot repainted and sealed about 13,000 a door depending on size of the units and mix.
20 units by 13,000 a door = 260,000 in rehab
600k - 260,000 - 15,000 when you purchased for inspections and closing fees - 56,000 listed above for when you resale as a seller is 269,000.
So the most you could pay is 269,000 for this vacant building and have zero equity after rehab and just have the cash flow working for you. On resale I am not even counting if the buyer will try to hit you up for a seller held second of 10 to 15 percent. The other component is how long it will take to get the property performing on the return for the time invested. Rehabbers can do 100 units as easily as 20 and they get more yield on the upside. For such a property I would want to get it at 2k a door to 3k a door for the work involved so 40,000 to 60,000 purchase price before rehab.
If you get lucky between now and the property fully performing which takes with apartments about 12 to 18 months depending on size you could get cap rate compression of sales prices where instead of your projected 8 things are going for a 7. You could swing the other way as well. These properties carry a ton of risk so you have to be rewarded big to take it on. I always am very conservative on numbers. If you aren't your positive can become a negative and now you are holding a property you might no want.
- Investor · Covina, CA · Member since 2012 · 28 posts · 3 votes13y
Joel Owens, thank you for that very well laid out info in words I can understand! To get to the bottom line, and for further clarity for me, the asking price is $375k, you suggest offering $40-60k for the property?
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes13y
Lorene as you can see from my cost breakdown that asking price is not even in the right Galaxy.
Now if this property only needed carpet and paint and was 1,500 rehab a unit then that is different from a gut rehab.
- Investor · Covina, CA · Member since 2012 · 28 posts · 3 votes13y
Sorry, Joel, I forgot to answer your questions, judging by the area and the other properties it is because the guy was basically a slum lord, the maintenance has obviously been very little if any in quite a while. The area has not changed in many years. There are a few apts but the last one was in the 80s.
There is some evidence of water issues in the roof of one of the downstairs units, the ceiling was cut out in a bathroom, but I could not get access to the upstairs or roof to see it. There is no apparent issue with the electrical but again I could only walk through a few apts, the rest are not yet vacant.
- Investor · Covina, CA · Member since 2012 · 28 posts · 3 votes13y
Joel Owens, yes I knew the asking was not even in the range of possibilities but, because this is Cali I don't think $40-60 will fly. Even with the required rehap. I will submit an LOI though and see what happens.
Another question, Joel, should I make the lowball offer right off the bat, or a bit higher then after my inspections come back with the lower offer?
- Real Estate Investor · Atlanta, GA · Member since 2013 · 27 posts · 1 vote13y
You should plan on major repairs or complete renovation to get this property tenable. I am not experienced in the LA market, but am very experienced in multi-family renovations. A complete overhaul for the building will cost between $30k & $40k depending on how many units are in the building. This is based on tight wholesale construction pricing and high volume construction. If you are able to get $850/ mo. fFor a 2bd/ 1ba in Covina or where ever the property is, then each unit is worth:
$850 /mo
x .75 NOI
x 12 months
$7,640 annual net / unit after property tax, vacancy and maintenance. (Add for broker involvement and professional services, if you are not planning to do everything yourself.)
A 6 cap would make each unit worth $127,500, which strikes me as very high unless it is near downtown L.A. in a nicer community. Basing your valuation on anything that a broker suggests is not a good idea because the more you pay the more they make. I would suggest that unless you want to buy blue sky that you offer closer to a 12 cap return which makes each unit worth $63,500. After you factor in renovation expenses you should be able to acquire this for about $25k per unit if it is a larger complex. Smaller properties sell for more and usually return less. If this is a bank owned property that is a great place to start. Market adjust to the reality of the marketplace and stick to your offer. If they are asking more than $60k per unit, unless it is move in ready (it’s not or it would have tenants), then you are paying too much.
Never pay for value that you create. - Investor · Covina, CA · Member since 2012 · 28 posts · 3 votes13y
Thank you, Jeff, for the input. Actually, my offer was countered and not accepted. It's a 20 unit in Fresno CA area and the rents were 495 (16 - 1bd) & 595 (4 - 2bd), but no one was paying (everyone is in some stage of moving out) and it needs major work.
- Multi-family Investor · Marietta, GA · Member since 2011 · 40 posts · 6 votes13y
Couldn't have said it better my self. It is very doubtful a commercial lender will finance a dark multifamily. So as james said, a cash offer will likely be your recourse.
Originally posted by James Hiddle:
First it's going to be very hard to determine the value of a MF property without income coming in since the value of multi's(5 or more units)is dependent of the income generated and not so much by comps.On top of that you're not going to get much financing if not at all if this isn't producing so you're going to end up paying all cash.
The risk is very high if there is no income coming in. If you can handle a cash bleed every month while you fix up the property and start getting tenants in than it might be worth it overall but that's if you can handle it.
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