Evaluating a 10-plex - first time with larger properties

[Tandi H.]

I'm going to look at a 10-plex tomorrow....the basics are it's 10 x 1-bedroom apartments, in a U-shape around garden entrances, with street parking.  Just over 5,000 sq feet.  Units are renting for $625 each.  Close to downtown area, historic structure (wood floors, old built in cabinets), neighborhood is a mix of SF and multis, B class.  Cute exterior.  From photos looks like decent shape.

APOD shows net income of about $40k per year, with management.  It's hitting right around the 1% rule in terms of sale price and gross rents.  

Also this week, we had a retiring landlord approach us about buying his portfolio, which includes a couple duplexes and single families.  

First, what should I be looking at when evaluating a 10-plex? So far we have just a duplex and SFR. Are there different things to pay attention to?

Second, if you could get the same net returns, would you choose to get a single property like a 10-plex or multiple smaller unit properties, and why?  What is more work?  Higher return on larger units or more units?

Thanks.

[Jaysen Medhurst]

@Tandi H., the value of commercial properties is determined by the Net Operating Income (NOI) divided by the local Capitalization Rate (Cap Rate) for similar class buildings in the same location. Using your example, if the NOI is $40k and the local Cap Rate is 8%, then the property would be valued at $500k.

The art comes in determining what the local Cap Rat is (work with local brokers/investors to determine this) and being darn sure of the NOI. You have to look at the actual building financials. Don't just take the owner's word for it. Then you have a place from which to start negotiations.

Remember, you're buying the property based on what it IS making not what it COULD make. If the owner or his broker tries to spin a tale about how you can "easily raise the rents" and that's why you should pay more, don't fall for it.

Regarding your question of 10-unit vs. mixed portfolio, 99% of the time you'll do better with the 10-unit. You have much larger economies of scale, lower management costs, and less complexity to deal with.

Finally, it's Class B property and the rents are $650/month? That sounds VERY cheap, no matter what the market. Make sure you're clear on the property class (as this will impact the Cap Rate). What's the neighborhood like? You simply can't have a "B" building in a "D" neighborhood.