How do I get estimated value of a portfolio of apartments ?

Question

I have been presented with an opportunity to buy an in vestment portfolio contains 4 separate apartment complexes in Central California totaling an asking price of 7.19 million. This is a mom and pop portfolio and they’re looking to liquidate. They’re very motivated but not willing to carry and would consider al a carte deals.

I am out of my element here but have a good rapport with the agent. How do I evaluate this deal to make an offer?

Steve Morris · Answer

Well, ask for REAL operating numbers on income & expenses.  Assume that'll be your walking in income.

Once you get that then use it to generate your preferred metric (CapRate, Cash-Cash, $/SqFt) and use that to compare pricing on actual comparable CLOSED sales.

Greg Dickerson · Answer

You have to value each property separately. Not as a package. You can't use rules of thumb or gross rent multiples to evaluate properties. There are way to many variables and GRM does not take into account value add, location, age, condition, geographical operating costs etc.

You have to evaluate every deal on its own merits based on actuals then determine if it fits your return requirements.

If you are unsure how to come up with a value it’s best not to pursue the deal until you educate yourself fully on the market and the business.

Austin Sine · Answer

(annual income + annual expenses) / (cost of buying + cost of rehab) . Depending on the area if the portfolio returns a number that makes sense, then go for it. Make sure to use all real and current numbers. What differentiates a good buy and a poor buy is deeply understanding your market and costs.

Gross rent multiplier (GRM) -- is a quick way to assess the property against others. GRM = (purchase price / gross income). You can use this against recent sales numbers.

Jimmy Mozingo · Answer

@Jim Kittridge  I am so appreciative for the input. The rents are below market. The property themselves will be upgraded in 3 phases and will command even more monthly income plus huge equity build. I’m not asking you to partner up as I am just entering in this arena but can you introduce me to people you know that might be willing to work with me. I’m going to work my ass off to ensure I do what it takes to make this happen. I know this is a good deal with excellent potential.

Again, thank you Tim. I am humbled by your willing to provide your wisdom, expertise, insight and candor.

If you know of someone willing to join me on this journey, please send my way.

Jim Kittridge · Answer

Some sound advice has been given. Based on the broker's numbers it's a 6.45% cap rate.

I would recommend underwriting it with your numbers to see where your NOI is. Typically, a broker's NOI calculation favors the seller by omitting or under-counting expenses/reserves.  Here are some common items that need to be accounted for:

• Deferred Maintenance
• Property Management
• Vacancy (speak to local management companies if you don't have a solid grasp)
• Taxes
• Insurance
• Maintenance Reserve (Not their cost)
• Cap Ex Reserve (Not their cost)
• Concessions
• Bad debt
• Turn-over cost

I would recommend using your own numbers for vacancy, maintenance and cap ex reserves. It isn't uncommon to see owner lowering their maintenance & cap ex to inflate the NOI before selling.

It's up to you to decide if the deal is attractive with your underwriting. Based on what you've shared so far, I would likely only do this deal if I could add significant value to it.

Jimmy Mozingo · Answer

@Steve Morris again you provide sound advice. I downloaded your book and giving myself a crash course in Apartment investing. Your book is amazing! Written with the new investor in mind in a language that is easily understood. I’m a 1/3 of the way through and already my mind is blown by how many things I did wrong entering into this deal. My tenacity, dogged determination and putting my fear in the back seat will move me forward. Worst case, I completely screw things up and have to scramble and hustle to do get this deal done. Best case, I find understanding, knowledgeable partners willing to work with me and create an profitable outcome for all. No matter what, the amount of education I’m getting is invaluable. Thank you sir.

Steve Morris · Answer

I’m understand enough that I have to rely on professionals to fill in the blanks where my experience falls short.

Well, you need to understand how the investment works.  You have good/bad brokers, however, relying on the kindness of strangers will get you one day.

Jimmy Mozingo · Answer

Steve. Great insights. I am pretty sure I will continue the buy and hold strategy and find some partners to go in with. The EM and POF are not my issue. My issue is educating myself on the pitfalls, shortcomings, do’s and don’ts, etc.

I’m understand enough that I have to rely on professionals to fill in the blanks where my experience falls short. Thus my posts to the BP community.  So far the responses received have truly been gold to me. Thank you all. Please keep em coming.

Steve Morris · Answer

"In my case, is this something I can wholesale instead? If so, what advice would you have ?"

Sure, but this amount of money, you've probably got a broker that wants substantial E/M and PoF.  He'd prob make it non-ref pretty quick.  So walking away would get expensive if you can't find a buyer.

So you could write in a clause saying you can assign your interest.  However, if the broker sees you want to make it assignable to an entity you don't control, I'd start asking you questions about your intent.

Scott Wolf · Answer

Without knowing the aspects of your market, I don't know if there is enough meat on the bones for a wholesale deal at $7.19MM, and you could lose a lot of money if you don't find someone to flip it to. I think the equity upside of partnering is also greater than the quick hit of a wholesaling deal as well.  Also, you wouldn't learn anything from flipping the contract on this deal.

How do I get estimated value of a portfolio of apartments ?

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