24 UNIT/ PRICE DILLEMA/ ADVICE

[Stefan B.]

Hello,

I live in St Louis, MO, I own 9 units, and looking to scale up.

I am currently looking at a 24 unit property, asking price 1.1MM. The property has lots of deffered maintenance issues as the owner self manages a 400 unit portfolio. I am talking 10+ years roofs, 15+ years AC units and water heaters, landscaping is pure dirt, and the 2 units that I looked at are in serious need of repair, like new baths, kitchens, paint and flooring.

Based on my calculations using the BP calculator and Jake and Gino's, in order to make sense of this deal I should pay no more than $900k in order to achieve 10% COC, 1.34 DCRS, and a cap rate of 9.1%. These calculations take into account a $4,000/unit/year for expenses. There is not much room at increasing NOI as the rents are about $20/unit below market.

My question is should I come in at a lower price since I might have some serious cap ex expenses in the near future?  My broker says that even $900K is low. As of right now the property is not on the market, so I am not sure as to how much I should offer in order to avoid a retrade scenario.

Thank you in advance for your input.

[Patrice Penda]

Hey @Stefan B.
Here is my take on this.

If 900k is the maximum you can pay for it to get the kind of the return you are after, then that is what is.

In which case, you should probably ask your broker whether the seller would accept 875k for example (900K being the maximum you want to pay, you want to live some room for negotiation).

If that does work you should move on to another deal.

An alternative option could be to get the seller to extend financing so that you can reach a middle ground. In which case, you could go higher than 900k and achieve the same return.
if there is no room for negotiation, you should move on.