Need Help With MF Valuation

[Daniel B.]

We're looking at out first MFH, a 4-unit residential property that is currently quite under-rented and are having a tough time figuring out what the property is worth. So far we've been dealing in SFH that carry around 6-8% cap rate and have been happy with that but like the idea of have 1 building to maintain and acquiring multiple units in one transaction.

The issue with coming up with a price is that valueing it based on current cap rate with under-market rents is definitely far below what it's worth, but a value based on a cap rate at market rents is also not representative since the building is obviously worth less with it's current income. From speaking to the agent I know they've had offers above what we think it's worth that they have turned down. It may just be that the seller wants too much and there is no solution but I was hoping investors with more experience than myself in this area could provide some insight into how they would value this and how much of a hit to cash flow would be acceptable in exchange for future potential.

The details:

4-unit purpose built building in an average residential area

Cap rates for 1-4 unit properties range from 6-10% depending on quality, location, conforming vs non-conforming etc.

Asking price $520k, dropped from original $550k and has been on market for a few months

Rents are ~$34,000 and should be ~$48,000

Expenses (excluding maintenance) are ~$9,000

- This puts the asking price cap rate at ~4.7% (not including maintenance)

- We estimate that at asking price it would be about -$260/month in cash flow and break even at a PP of ~$450k assuming our typical 10% of rent for maintenance

- We estimate the building would be worth around $530k at market rents

We were thinking the cash flow neutral price would be our best offer, but their indication was that they are looking for close to 500k. The main question we have is how high is it worth going now, and how much negative cash flow should be tolerated (if any) for future upside? At $480 we'd be -$100/month but stand to make ~$50k if we can bring rents up to market value