Seeking advice about 8unit apart deal analysis. Any thoughts?

Question

Hey Bigger Pockets!Looking to get some advice on an 8 unit apartment building that I'm looking at purchasing. Here are the numbers:Current asking price: 680,000Rent: Monthly Rent: $5,585. AVG MO Rent/unit: 700. Annual 67,020. Looks to be under market rent currently with room to increase about $125/unit. Not much to be done with respect to repairs as it was recently renovated. NOI: $43,943: w/prop mgmt: 37,133 (10%)Cap Rate right around 7%Nice area. I'm using NOI dived by the cap rate to get a price of $530,471. That's after taking out for property management. Without, I'm at $627,757. Obviously the deal looks far better at $530,471, but should I be using the NOI after prop mgmt fees are subtracted, or am I living in fantasy land? Anything else I should be looking for or using to arrive at a good price? After pushing up the rent to market, cash flow would hit about $125/door. Currently priced, it's cash flow negative and that's my concern. Having never bought anything larger than a duplex, I'm curious if this is common in apartment deals of this size. Still feels over priced and I'm looking for confirmation.Thank you for the advice!

Meghan McCallum · Answer

@Dustin Schaefer, you are now in commercial real estate. Here, the property is a business and don't you dare pay more for it than it is worth. Even if the tenants paid for everything...you are looking at paying $85k per unit and hoping to increase the rents to $700?There's not enough meat on that bone. Especially because the loan isn't large enough to be non-recourse. It just sounds like a skinny deal with no upside.Throw these deals in the rental calculator. If it ends up that your DSR isn't a 1.25... your bank won't even consider the loan.

Mark Douglas · Answer

@Dustin Schaefer You may consider calling a few commercial brokers and ask what the going cap rates are near that apartment, to hone in on your baseline valuation. Also, you could call a few PM companies to verify which areas they service. Hope this helps !

Daniel O. · Answer

@Dustin Schaefer When you say you could bump rent to get it to cash flow at $125 per door, what is your starting point? In other words, what is your purchase price? What is the place currently assessed at for tax purposes, and what are the taxes? If you purchase for more than the current assessed value, you will want to also factor in an increase in your property taxes. Other questions you need to be asking and building in to your evaluation: What costs is the landlord responsible for, and are you including them? What utilities does the landlord pay? What vacancy rate are you using, and is it realistic? Is the place in an economically diversified area, or is it vulnerable to problems based on the decisions of one employer in the area? Is 10% realistic for the property management? I would expect slightly lower for a multi-unit simply because of the efficiencies. Even if the place doesn't need anything right away, you should be setting aside reserves to cover things that will eventually need to be done. Are you factoring that in? How did you arrive at 7% as the cap rate for this place? Is that based on comps?Have you factored in all of your costs, including vacancies, to get your NOI, or have you only included management? Without seeing your math, its hard to know just what you are looking at. I would encourage you to sharpen your pencil and go to work to make sure you have addressed these considerations in your analysis. Once you have done so, then you can start to get a sense of what the place might be worth to you. Not worth to someone else, but worth to you. You can do that by dividing your NOI by your cap rate, which brings me to my final thought. A 7% cap rate seems high for what you describe as a "nice area". I suspect that whoever priced the place was using a much lower cap rate. Good luck.

Dustin Schaefer · Answer

@Mark Douglas, sound advice. Doing that today! @Daniel Odess- loved your response! Definitely gave me a lot to consider. I never thought about the tax ramifications. Every time I use BP, I come away being better for it!Thanks for being awesome guys and gals!

Dustin Schaefer · Answer

@Meghan McCallum, your response was perfect! Thank you for the advice! Plugged the deal into Rental Calc prior to posing the question and found the same result you're pointing out - wasn't sure if I was misinterpreting something. It's clear to me now. Thanks again!

Corey Grant · Answer

I'll be watching to see what kind of advice you get I'm loking at possibly buying about 10 SFRs from a local landlord. But I have never bought in mass like that, and never bought rentals with renters or from an investor. So I'm trying to learn what questions I need to ask...-corey