How to Determine if your Offer is Realistic During your Due Diligence!

Once you have an accepted offer, the seller will typically provide you with their financials. At this point, you can determine if the numbers that you have been given will allow you to cashflow. This will also help you to determine if you have offered too much for the property. Because you are in your due diligence period you can make any necessary adjustments to the purchase price or back out if things aren’t what you expected.

When you are looking at the expenses for a property, you can assume that most properties will cost about 35% of the gross rents. If this property’s expenses are significantly less than that, this might be a red flag that you should look into.

If for some reason you are unable to get the property’s financials, then you may not want to proceed with the offer. If you do continue with the transaction, you can determine what the property should rent for by looking at the surrounding properties. If you know that the average rents are for each sized unit, then you can look at the number of units that your property has and come up with a gross estimated annual rent. You also want to factor in the vacancy rate for that area. Once you have a number, you can divide that by the cap rate that you want to get.

For example, if your Gross Operating Income is $300,000 based on full occupancy and your vacancy rate for the area is 20% then your gross income would be $240,000. Now, you need to take your 35% expense rate into account. That means that $84,000 a year will be spent on expenses. So that leaves you with $156,000 in income. If you want to get a 9% cap rate, then you can offer $173,334 for the property. However, if you want a 12% cap rate then you need to offer $1,300,000.

There are other factors to keep in mind when making an offer. You need to look at how much maintenance and upkeep needs to be done to the property and what that deferred maintenance is going to cost you. Those also factor into what you can offer for the property.

Once you have an accepted offer, then you have access to the financials on the property. This allows you to make a more informed decision on whether or not this is a good opportunity. You almost always make your money on the purchase of a property. In other words, don’t overpay for a property. Make sure that the numbers work and as always, happy investing.