14-Unit Multi-family - How to figure out value for price point?

[Allan Smith]

Looking for help on figuring out what this complex in Nashville, TN, is worth so I don't over pay. I will likely syndicate or wholesale the property.

I don't know standard cap rates for the area, but the area is Madison, TN, which was historically low-income, but houses are being rehabbed and rents are going up as affordable housing within 15 minutes of nashville is slowly disappearing. Here's what I know:

Seller uses 2 2-br units, and rents 2 2-br unites and 10 1-br units. She claims her net income was $97k in 2016. Seller is asking $925k but isn't particularly motivated.

• gross monthly income is about 8900 with section 8 tenants mostly.
• property in great condition except for old aluminum windows and parking lot is a little beat up.
• Taxes $10k annual
• Insurance $4300 annual
• Let's assume $15k maintaince annual
• Assume $15k capex
• Assume 8% vacancy

That puts her current cap rate at about 5.7%

Value-add cap rate after we purchase, by renting those two unused units, goes up to 7.6%

What can I pay for this place?? Thanks everyone!

[Steve Vaughan]

Last time I bought a couple older complexes slightly on the shady side of the tracks (in '03 and '07), I got two 1.4%/mo producers at a 12 &14 cap. The CAP rate now in the area has compressed down to 7.5. There was deferred maintenance and the sellers were motivated. You are looking at a .96% producer and need a fee to pass this along.

You do need to know what the market cap is for this area and for this type/age/condition of asset.  Call commercial brokers and property managers to get an idea.  Without knowing the market cap, you'll be missing a key financial metric that helps determine value.  Good job for knowing you need to know it and referenced that you don't yet.

Lastly, we buy on actual returns and condition, not after the value-add or ARV. My gut says a 5.7 isn't nearly enough return for the risk and PITA you or your end-buyer are about to take on. The seller isn't motivated to boot. Price it at a 7.6 just for the fun of it and mention that in conversation. If she owns it free and clear, include seller financing as an option in your LOI if you get that far. Will have a larger pool of buyers for a SF deal of course.

Some of my best 'deals' have been the ones I didn't buy.  Good luck and please keep us posted @Allan Smith!