14 Unit Complex Analysis

[Peter Amico]

Hi all- 

I am looking at a 14 unit property and here is a link to the listing. (http://www.loopnet.com/Listing/20404304/415-e-Magn...)

This is more of an academic exercise as I am currently buying 3/2 SFRs, but I want to think about how to value multi-unit apartment buildings. However, here is how I think about it and wondered if others had more advice on a better way to value the property. 

Property appears to have quite a bit of deferred maintenance and the capital expenditures over the past few years seem to bear that out as well. 

Asking price: 1.1 million

-14 units (mix of mostly 2/1.5s). You can see unit mix at link. Gross Rents= 104K

-Taxes= 8,700 in 2016

-Insurance- 13,500

-Repairs/Maintenance (6%)- 6,200

-Capital Expenditure more in early years (10%)- 10,400

-Management (8%)- 8,320

-Water/Garbage- 4,250

-Debt Financing (assuming 20% down)- 880k/20 year/5%- 70k- Should this be different assumptions? I dont know much about term/rates on commercial loans. 

-NOI= 104k- 8700-13,500- 6,200- 8,320- 4,250= 63,030

-Cash Flow Before Tax- 63,030- 70k- 10,400k (capex) = -17,400k 

-Cap Rate= 63,030/1.1 million= 5.73%

Am I evaluating this correctly, or am I totally missing something? I cant see any world where this property cash flows at anywhere close to the asking price? For cap rate of 9%, the price comes down to 700k. I think I can make those numbers work. Then debt financing goes to 44k.  So Cash flow before tax goes to 63030- 44k-10,400 (capex)= 8,630. I would still not be wild about this deal at those numbers. That means 140k of my money is returning, before tax, 8,630 (6%). Also, that is at a much lower price than the asking price. What types of cap rate should I be looking for on  these types of properties? Do these not cash flow well? Any feedback is welcome. What am I missing here? 

[Barry Collier]

I think you will likely get varying opinions on whether capex goes above or below the line. And both can probably be justified. I personally use the capex as an above the line expense, as it is attached to the property.

The reason you don't include debt service as part of NOI is because the debt terms will vary depending on the investor's situation. Capex, however, is part of the real estate and doesn't (or generally shouldn't) vary from investor to investor. Whether I purchase the property or you do, we will likely encounter the same capex costs, so in my opinion it needs to considered as an above the line expense and reflected in the NOI, since that is the main driver in price.

Now whether the seller will agree with you is another matter entirely. :/