16 units-How much are they worth per unit?

Question

Greetings Bigger Pockets Members,

There is a local seller with a 16 unit complex that he is asking $899,000 for.

This price is way too high and he knows this, he has already knocked it down from 56k per unit to 50k per unit after one email. Which knocked off 100k from asking price. I offered 35k per unit and he countered with 50k per unit.

These units rent for $550 per month and they stay 90-100% occupied.

Would the magic number per unit be in this case?

Taxes are $5600 per year or $467 per month.

Insurance is running him $650 per month.

He is also willing to owner finance 50% of Sale price.

This would be my first set of apartments. I think at around 600k or less there may be a deal here.

Any thoughts, experiences, or advice greatly appreciated!

Thanks

Jordan

Joe Fairless · Answer

@Jordan Vires

agree with you that around 600k there might be  deal assuming that the market cap rate is around 8.5%. I used some big-time assumptions for expenses and deferred maintenance to come up with that. Owner financing makes it more interesting and if you can come in with little out of pocket then that could be a good deal. Too many unknown variables (i.e. age of property, condition, market cap rate, seller motivation, owner financing terms, upside in property, etc.) in play to give more concrete thoughts.

Account Closed · Answer

The actual sale price may be secondary if you are able to get favorable terms on the owner financing. Value and price are two different concepts.

David P. · Answer

@Jordan Vires the best way to evaluate is to use 50% rule (See @Brandon Turner video "How to Use the 50% Rule to Analyze a MultiFamily Investment": https://www.youtube.com/watch?v=KQmChuIW_sY); do you think you could make the mortgage with 1/2 the rent?  Not sure if utilities are inclusive or not, but you may need to take this into account as well when figuring out your numbers.  So $550*16=$8800/2=$4400

If you were able negotiate the price to $700K and 25% down and have loans of $575K @6% you would be at $3150 (P/I) payment and the difference would be $1250 or $78 per door and if you were to get the purchase price lower without having to pay utilities it probably would be a good buy.

Additionally, evaluate the outstanding maintenance on the property such as roofing, flooring, interior/exterior paint, appliances etc and see what their life expectancy is.  In all properties it good to have a Reserve Plan of these items, expected life and how they will be paid for during your ownership.  Ask the current owner if he has something like this in place and if he does, ask to see it along with the rent roll for the past 5 years.

It appears the current owner is motivated to sell if he is dropping the price and willing to finance.  It maybe worth exploring the idea of 100% owner finance as well; he could have a steady cash flow for the next 10 years but amortize the loan for 30yr and then re-fi the loan as you increase the value of the property.

You want a deal, but don't blow an opportunity explore other financing opportunities with the owner.  Sitting down and having a coffee or lunch to understand his goals is money well spent.  Do your due diligence!

Good luck, and please remember to VOTE on reply's you think have helped.  This validates respondents posting and lets readers know that this information was valued.

Hope you have an excellent future!

- Dave

Joe Fairless · Answer

@Jordan Vires without knowing the property (or seeing it) I'd generally say to put $250 - $300 per unit per year away for capital improvements reserves.

Brie Schmidt · Answer

@Jordan Vires Here is a decent link to explain

http://www.noneman.com/pdfs/White_Paper_Cap_Rates....

Brie Schmidt · Answer

16 units * $550 a month = $8,800 a month or $105,600 a year

Assume 50% expenses without actuals (you need to get actuals)

50% expenses = $52,800

NOI = $52,800

So at a 10 cap the property is worth $528,000

You need to find out what the going cap rate in your area is (call a commercial lender and ask)

You need to see actual expenses to properly calculate this

Brie Schmidt · Answer

@Jordan Vires - The one I am doing now is a 14% cap - but it is weird as the loan is commercial but it is a package of 8 properties and 19 units

Jordan Vires · Answer

@Brie Schmidt

Thanks for the link!

What cap rate do you try to buy your apartments at?

You have been successful! Good Job!

Jordan

Jordan Vires · Answer

@Joe Fairless

He said he would owner finance up to 50%.

The bank(s) I have been dealing with require 15% down payment. However, owner financing counts toward down payment. So there is a creative option there. I am trying to get in with little or no money down because I do not want to buy in, in order to force the property to cash flow.

Market cap rate is around 8% here.

How much on a multifamily would (% wise) would you put back for future maintenance?

Thanks

jordan

16 units-How much are they worth per unit?

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