analyzing my First Commercial Deal

[Vicky S.]

Hi All,

I am working on scaling myself into the commercial RE and am talking to a prospective seller (they are looking to retire). here are the initial high level numbers: 

Location: Chicagoland; Unit Type: B

# of units: 20; 3B/1.1Ba | 60-70 yrs old property.

Questions: 

1. what would be the price you would offer to the seller, given the current market conditions? currently the ask is really high ($4+M)?
2. how would you have sold this back to him without sounding very arrogant and not losing the entire conversation in the process? 
3. Seller was telling me that i should account for the reduction in taxes, that i will experience, due to the depreciation into the cash flow(I have a decent paying W2 job that i do not intend to stop anytime soon, i am looking for this as a passive income source and replace my W2 income at a later pt). Is this even the correct way to analyze the deal? 
   
4. Seller also wanted me to account for the first yr equity & possible appreciation that i build into the property? is there a way to calculate that into the model to depict the right price. should i even do this? 
5. I think i am too lenient on my debt servicing calculation? do you agree? 
6. Am I missing any critical information to evaluate this deal further?
   
   

Looking for your experts opinion/ input to help evaluate this deal further. Thanks in advance. 

[Greg Dickerson]

Originally posted by @Vicky S.:

Hi All,

I am working on scaling myself into the commercial RE and am talking to a prospective seller (they are looking to retire). here are the initial high level numbers: 

Location: Chicagoland; Unit Type: B

# of units: 20; 3B/1.1Ba | 60-70 yrs old property.

Questions: 

1. what would be the price you would offer to the seller, given the current market conditions? currently the ask is really high ($4+M)?
2. how would you have sold this back to him without sounding very arrogant and not losing the entire conversation in the process? 
3. Seller was telling me that i should account for the reduction in taxes, that i will experience, due to the depreciation into the cash flow(I have a decent paying W2 job that i do not intend to stop anytime soon, i am looking for this as a passive income source and replace my W2 income at a later pt). Is this even the correct way to analyze the deal? 
   
4. Seller also wanted me to account for the first yr equity & possible appreciation that i build into the property? is there a way to calculate that into the model to depict the right price. should i even do this? 
5. I think i am too lenient on my debt servicing calculation? do you agree? 
6. Am I missing any critical information to evaluate this deal further?
   
   

Looking for your experts opinion/ input to help evaluate this deal further. Thanks in advance. 

 Can’t really speak to value or what to offer without knowing type of building, location, condition, etc but you should be able to find comps. Looks like your at $200k a door. You need to compare this to similar properties for sale and that have sold in the area. 

For underwriting your vacancy assumption should be 10%, managemnet 10% taxes Ave insurance will go up marine significantly bare on new purchase price value, you need a CapEx budget of at least 5% marketing fees, admin, legal and miscellaneous 5% you may need to allocate more or less depending on property location and condition.

You do not account for depreciation or any other tax incentives in your model or for ROI that's just icing on the cake.

Equity gained through increase in income and value does come into play in calculating ROI but not in determining what to pay the seller. You offer price should be based on scholar as is not some future vague you have to create.