Determining a good purchase price for multiunit in worth, il?

[Ben Ballinger]

Hi REI fam, I'm currently looking at an off-the-market 4-unit apartment complex in worth Illinois. It's owned by a friend of a family friend, who has owned it for many decades and is retiring and wants to get rid of it. I'm having a lot of trouble determining a proper entry point for making an offer. The reason is because there are not many other sales in the area for me to formulate a typical cap rate from. For what it's worth, I have read as much as I possibly can on due diligence for multi units but there appears to be some contrary vice, some people say use cap rate, some people say cap rate is useless, some people say to verify expenses with the landlord before running the numbers, other people say that's pretty much impossible, but the main underlying pattern I see is that experience trumps everything. I've never bought a multiunit before so I can't just go off of my experience here, so I'm hoping someone more experienced can help point me in the right direction. The building is a standard four unit apartment complex with two floors and a central staircase. There's also a full basement. Each unit is two bedrooms, one bath. As is typical with old-school landlords, the units are all on month-to-month rent and way below market value (rents range from 600-800 dollars) The people that live in the units are poor quality tenants: many of them smoke in doors and the building smells like crap, they are very messy and I imagine they are hard to deal with based on my understanding of low rent tenants. I have been unable to enter any of the apartments themselves because they are all occupied, but I am just going to go off the assumption that all four units will need a complete renovation. I plan to kick all of the tenants out immediately and then renovate each of the apartments so that I can attract higher paying, better quality tenants on normal year leases. The reason I plan to kick them all out at the same time is because I feel like they would scare off better tenants if they are still occupying their apartments and smoking in them, leaving their crap all over the laundry room, etc. without seeing the apartments, I am estimating about $15,000 per renovation plus I am building a garden unit in the basement (which I will live in, this is a house hack). Overall I'm estimating between 100 and $120,000 in rehab costs. Another area I can increase revenue is separating the utilities and charging the tenants for utilities; right now they don't pay utilities (of course, and run ac all day when they're not home and stuff like that). When I ran the numbers as best I could, I came up with a purchase price of around $350,000. However, this was not accounting for the rehab or vacancy when I kick all tenants out. I'm wondering if closer to $230,000 to $250,000 would be a better starting point. Perhaps even lower. Worth is not a hot market so I don't expect any appreciation overtime other than value add improvements that I make. I'm much more concerned about positive cash flow. Also, for those of you experienced with different types of lending, would you recommend an FHA rehab loan since I will be living there? Or should I try to go with Hardmoney for the renovation portion and a conventional loan for the initial purchase? Thanks a lot and I look forward to learning more from you guys

[Jeff Valentino]

No one is going to lend on income approach for a 4 unit, so why use it? Price it like a house. ARV-Repairs etc to make an offer. There was a clean 4 unit that looked like it needed cosmetics that sold for 265k, if you want to use that for as is value, but it sounds like this one is in worse shape.