How to analyze small commercial multi family

Question

I began looking into commercial multi family 8 - 30 units. I have a criteria that i'm looking for. However, I'm having mixed feelings on how these sellers are valuing their property. My understanding was they base price based on the current rent that the property is producing. However, I'm seeing many listing that are counting vacant units and on top of that they're pricing it at market value instead of the highest rent they're currently getting.

How are we supposed to value commercial multi-families?

Jay Helms · Answer

@John Moon - offer price is simply the NOI divided by the cap rate. The difficult part of an analysis is verifying the operating expenses. If you want a second site of eyes to review I’m happy to look - Practice keeps me sharp.

Andrew Johnson · Answer

John Moon Ummmmm...well...the “I have criteria” issue exists in commercial multifamily, SFR, I’d guess mobile home parks, etc. If the price was extremely attractive, it would be sold. So all you have to focus on is what your price would be for a property. You can adjust for anything you want: rehab, vacancy, stabilization, etc. And if you’re correct about the price being crazy then you’ll be the *only* offer. Now if the owner isn’t motivated the conversation will go nowhere. If the owner is motivated you’ve at least opened the dialogue. Net result, don’t get hung up on the “ask”. I never have. Just focus on analyzing to create your number and don’t get frustrated with the “no” that will come 97% of the time 😊

Ivan Barratt · Answer

@John Moon at this point in the cycle it takes 200 opportunities to find one actual deal. Know this: the professionals have acquisition criteria that they don't violate! Keep getting educated any way you can and don't be in a hurry to buy something. Deals are like buses. There's another one coming down the street any minute!

Matt Mawhinney · Answer

All good advise; "another bus..", "stick to your criteria", but probably my favorite comment by RE Agents is "opportunity to raise rents to market levels". Yeah, why didn't you do it?

John Moon · Answer

Thanks all. Yes this helps keep me grounded. I don't want to jump on the 1st bus that comes b/c it's going somewhere. I need to be patient to find the right deal that fits my criteria!

John Acheson · Answer

I would say the 1st step in your analysis should be looking over the last two tax returns.You'll need to calculate your own net income figure x vacancy rate to determine your offerby dividing your NOI figure by the area's average commercial CAP rate.That should give you the beginning of a good offer amount to compare with the ask.Also, do you have a seasoned LLC with great credit as well as an excellent credit score?And finally, as this 2018 trade war melts down the stock market while raising consumer prices across the board, can you afford to wait to see if real estate softens, and your lower offer might get accepted as fear takes over our economy?

Patrick Hermans · Answer

@John Moon Agents will do that to try and drive of the offer price on the property. My advice would be to do your own evaluation and tell the seller your offer is based off current rent. They might take it.

John Peine · Answer

I might also add, if in the negotiations they bring up the fact they should get more because you could easily raise rents/decrease vacancy. Reply tactfully "if it's that easy why didn't you do it?" Not entirely sure how to do that yet. :PBut it is important you don't let yourself bogged down in work they neglected to do.

Ola Dantis · Answer

@John Moon I can relate to your mixed feelings; however, the issue of sellers asking for ridiculous prices for their buildings is never going to go away, as this is intrinsic to human nature. Now, what do you have to do? You already said it: criteria. Stick to your criteria and I love what @Ivan Barratt said about another bus coming down the street. And guess what? That bus might not be going to your destination either and that is OK! Let's all remind ourselves: the RE strategy is called Buy & Hold (long-term). Hope this helps. Goodluck John. Thanks! - Ola

Patrick Hermans · Answer

@John Moon I share everything. There is no way anyone will win if either of the sides in a transaction are holding back information. I will show my numbers and tell them how high I can go while making it an investment that I would be willing to take on. If they dont want to sell at that price, then its not the right investment for me. If my number isnt what they want, then we wont be able to come to a deal, so I dont want to waste my time trying to force a deal that wont happen. Im an open book in negotiating, it either works for both of us, or it doesnt.