Multifamily Deal Doesn't Add Up...

[Matt Teegarden]

Hello BP!

I'm running numbers to get some practice and I came across a property on Crexi that just doesn't add up for me.

I'll lay out the numbers if anyone would care to chime in, maybe I'm just missing something. There is a lot of info not listed so I did my best with the calculations and assumptions:

- Multifamily Apartment - Value Add - 32 units

- Total income / year = $256,264.97

- Total Expenses / year = $234,781.81

- NOI = $21,483.16

- Average rent in area per rent roll & rentcafe = $1,200 / unit so $460,800 / year (which is different than what is shown on ProForma)

Anyway, I go to use the valuation calculator on Crexi and the first number that makes sense for a purchase price is $500,000 (super low for a 32 unit complex). When I enter $500,000 for purchase price with 30% down ($150,000) it still spits out these super low numbers at me (4.3% CAP, 1.75% ROI, $2,623.12 Annual Cash Flow).

Would anyone please help me make sense of this?

Here is the link to the listing (maybe someone will find this an awesome deal).

https://www.crexi.com/properti...

Thanks in advance!

[Evan Polaski]

@Matt Teegarden, as noted, the deeper the value-add play the less cap rate matters. In fact, cap rate only matters in core deals where there is no meaningful way to increase value. In value-add deals, typically you are looking at ability to move yield (going in cap rate vs stabilized yield, and making sure that delta is large enough), IRR, equity multiple on deal, and maybe average cash on cash over hold period.

That being said, if the rents can really almost double, I would be skeptical of the true risks of the asset.  Can the area and existing tenant base really afford $1200/mo?  Will your turn over costs be super high given the $650/mo average rent now.  What amenities does a 1200/mo tenant expect, and do you have them?  

Remember, returns are all a measure of risk. And I am always skeptical of any business plan that says "you can do this and make all this money".  If that were really true, the current owner would find a way to do it.  Not that people don't sell all the time with meat on the bone, but remember the current owner bought it to make money, and brokers have every incentive to paint the rosiest picture possible to make the owner even more money on sale.