Please Provide Deal Analysis on a 12-Unit. Feedback appreciated

[Kevin Hunter]

An off-market deal has been brought to my attention.  The owner is not selling, but is not opposed to selling.  The unit is a 12-unit apartment building in Connecticut.  11 of the 12 units are currently rented.  All units are 1 bedroom, one bathroom, with a bonus room (either guest room or office).  I am not sure why the additional space is guest or office, my guess is no closet or window.  All units rent for $750 a month. There is off street parking for all the apartments, a four bay garage and 8 additional parking spaces.  My analysis is below.  What I request assistance with is help formulating a offer price.  I have an idea of what I think is a reasonable offer price, but I haven't purchased an off market apartment building yet and am a bit unsure where to start the discussion on offer price......

Unit x 12	$750
Total	$9,000
Income	Monthly	Annual
Potential Rent Collected	$9,000	$108,000
Vacancy Loss	$900	$10,800
Gross Rent	$8,100	$97,200
Operating Expenses	Monthly	Annual	(% of Income)
Management Fees	$450	$5,400	6%
Repairs and Maintenance	$900	$10,800	11%
Lawn Care	$0	$0	0%
Gas	$0	$0	0%
Electric	$50	$600	1%
Water	$150	$1,800	2%
Sewer	$66	$792	1%
Snow Removal*	$40	$480	0%
Roof Fund	$0	$0	0%
Taxes	$600	$7,200	7%
Insurance	$666	$7,992	8%
Operating Expenses	$2,922	$35,064	36%
Financing	Monthly	Annual
Principle + Interest	$2,725	$32,705	34%
Performance	Monthly	Annual
Net Operating Income	$5,178	$62,136
- Financing	$2,725	$32,705
- Improvements	$167	$2,000
= Cash Flow	$2,286	$27,431
Custom
PITI	$3,991
Cap Rate	10.4%
GRM	6.2
ROI	22.9%
Ann Inc - 10% / Purch Price	14.6%

I plugged in 600K for an offer price because that warranted a cap rate of 10%+. That is not my answer necessarily, but a good stepping off point, I thought. With the ROI high enough I am open to offering a bit more but obviously want to get in as low as possible. Additionally, I used a commercial loan as the basis for funding with 20% down, but am hoping to work seller financing to entice them to a lower price with opportunity for interest and a monthly income stream. Not the only option, but one I am going to work.

Other notes:

The units are in extremely good shape.  This is essentially a turn key deal, not a value add

The unit rents are undervalued (roughly 10%).  Not a consideration in offer price, but a nice benefit.  They should rent for between $800-$825.

Off street parking is rare in this area.  The fact that they all have a space makes them appetizing which helps keeps the vacancy rates low.  I will still plan for 10% of course, but the parking will help.

Please help me find a good offer price that won't end the conversation with the seller, but is a good enough deal to make it happen.

Thanks all in advance!

[Michael Le]

@Ralph R., the answer is yes, of course I would pay more. In your exaggerated example I would not pay much more but I would. Your line of thinking of how most sellers try to get buyers to overpay. "The property has 15% vacancy, but don't worry it's really easy to fill units." Oh yeah? Then how come you haven't done it yet? In your case, Oh yeah, then how come you haven't fixed roof/boiler/<insert broken item here> yet?

And NOI is not a poor judge of value, it's basically the only judge of value. In a given sub-market the cap rate is set. You can't use cap rate to compare two similar properties across the street from each other because they'd be the same. So the only thing distinguishing the value between two similar properties is the NOI. Your example ironically is the exact reason why cap rates and NOI are used to compare properties instead of something like cash flow.