How do I determine the offer amount for a fully renovated buy and hold multifamily unit with tenants in place?

Question

I sent out about 200 yellow letters last week and another 300 this week and the calls have started rolling in!

I am totally psyched! I love talking to people about their properties and listening to their situation. Most have not been very motivated but I did have one caller who is motivated - an out of state owner who owns the property free and clear.

I have read and heard a lot from investors who flip properties in my area about how you should make offers that are 65% of ARV - repairs - wholesale fee. But I don't think this property fits into the fix and flip model.

So what are some rules of thumb determining the max purchase price an investor would consider for a buy and hold multifamily with good (according to seller) tenants in place?

Here is the property info:
(mind you this is all info from seller, i have not seen the place yet)
The property is a 2 family house that was moderately renovated this year (kitchens updated, new tile, painting etc.)

1st floor - 3 br apt, renting for 1100, 
2nd floor - 4 br apt, renting for 1200. 
additional 2 bedroom apt in basement (not legal) and not currently rented.
Taxes are $8400.
40 min commute to Manhattan via path train. 20 mins drive to manhattan. In a good neighborhood in Jersey City near a park.

The current rents seem really on the low end IMO for the area. But again, I haven't seen the condition of the place yet.

I have heard of the 2% rule for buy-and-hold properties (rent should be at least 2% of purchase price), but that is a really tough thing to achieve in the new york/ new jersey area. In addition, how are the high property taxes in new jersey taken into consideration when determining the max purchase price that an investor would consider for this property?

Any advice would be greatly appreciated!

Mala S. · Answer

Roy N. Thanks for the info!
However, That sounds really low to me for this area.

I guest I should call an insurance company and JUST ASK and solve this big mystery once and for all ;)

Mala S. · Answer

Chad Ballard Thanks for the great info about the cap rate not including financing and about the 50% rule. That's exactly what I wanted to know.
Thank you!

Chad Ballard · Answer

@Mala S., just to bring things back to your original question.  How I determine if a property is a good buy and hold really has more to do with cash flow rather than the property value itself.  Of course I will check to see what similar properties in the area are selling for using comps (even duplexes) but if I am holding the investment long term this is less of a priority for me.

What I do and a lot of other investors here on BP suggest is apply the 50% rule as a quick way to see if you have a deal or not.  From the total rent of $2300 per month 50% of that will be considered expenses over the long term (operating expenses and vacancy).  With the remaining $1150 subtract out the debt service and hopefully you have a few hundred dollars in cashflow.  If you are negative then you probably don't have a deal.  You can use this formula to backtrack a walkaway number for the deal.

Chad Ballard · Answer

Corey Jacobs, the 100 I think was meant to be the cap rate of 4%.  Maybe the formatting came in funny.  NOI of $12300 divided by the cap rate of 0.04 is $307,500.

Mala S., Another thing to add is that cap rate is a way to analyze a property regardless of financing (Cap Rate = Annual Income/Total Value).  The point is to remove effects of financing and compare properties at a high level view.

Mala S. · Answer

Corey Jacobs actually it was (12,300/4) x 100 = 307, 500
sorry, i guess it was confusing the way I wrote it.

basically I was dividing annual net income by a market cap rate of 4%. 
But really a cap rate of 6-8% is more realistic for that area. An appropriate cap rate in your area will likely be drastically different...

Corey Jacobs · Answer

Just curious but with your math you had a net income of$12,300. You took 12,300 x 100= $306,500

I'm just wondering how you got that to be the answer to the equation. Looks like to me 12,300 x 100= $123,000.

Am I missing something?

Chad Ballard · Answer

I agree with Mike B., Flood insurance is a bit tricky since there is not a lot of places that are moderate risk that purchase flood insurance.  Typically you are either federally mandated to purchase because you are in a high risk area or the homeowner does not pay for it.  It is hard for an insurance company to have a stable business model if there are only high risk homes insured.

Mike Berlay · Answer

Mala, 3k was on 2 family 500k house on staten island. We also did not know that insurance in flood zone maybe tricky. A lot of companies do not want to insure it.

Roy N. · Answer

Mala S.

Insurance costs will vary by region.  Here we estimate ours in the range of $0.04 - $0.06 per $1000.00 of property value.

Mala S. · Answer

Mike B. btw, where did you get the info about the 3K for insurance in flood zones?