All Forum Posts by: Chris Washington

@Derek Carroll Fantastic info...thank you. Given that this is a pocket listing, I'm hoping I can have an advantage over other investors in the area. However, I currently focus on value add commercial multifamily, not full-scale fix-and-flips (which is what this property seems like it may be), so don't want to bite off more than I can chew. Having said that, a good deal is a good deal so if I have one on my hands I don't want to pass it up.

@Tyler Weaver makes sense. I should get a good idea of whats driving the current financials after walking tomorrow. At this point I assume poor management, lack of repair, and non-rentable units. In your experience, is this a type of deal that a local/regional commercial lender will touch our will this likely take a hard money approach?

@Derek Carroll Thanks Derek. I like the price per unit basis, but my questions are as follows:

1. How do you account for different unit mixes between buildings? For instance, if the comparable sold at $25k per unit, but contained 1, 2, and 3 BR units, I imagine you wouldn't want to pay $25k/unit if your target property is only 1 BR, right?

2. Should I only be willing to pay price/unit based on the units that are actually rentable as of today? i.e. if the complex is a 50 unit complex, but only 30 units are rentable and comps have sold at $20k/unit, would my max purchase price be $600k?

@Account Closed

Quite frankly, this is exactly what I'm trying to figure out. I underwrite with a 25% down payment, but everything is variable based on purchase price. I'm just having trouble getting my head wrapped around what a realistic purchase price for a negative ROI property would be. Any ideas?

@Anthony Chara

Thank you VERY much for your detailed response. Those are great suggestions. Couple of questions:

1. For the valuation #1 approach, how do you account for a variation in unit mix? for instance, if the comparable sold at $25k per unit, but contained 1, 2, and 3 BR units, I imagine you wouldn't want to pay $25k/unit if your target property is only 1 BR, right?

2. I will see the property tomorrow, but I believe it's got a higher than average vacancy rate and a few down units. Is walking the property with a GC the best way to figure out rehab costs? Should this all be done before or after submitting an LOI?

@Sean Cole

Thanks for the reply. The pro forma is actually built based off the property being stabilized, so I can't imagine the broker will expect I would offer based on those numbers when I would have to invest my own cash into the building to even get to those numbers.

Replacement cost is interesting...any advice on how to estimate that? I've never developed from the ground up, so not sure how I'd go about finding an accurate estimate.

I've also seen other deals where investors purchased lower than the replacement cost of a building, so I imagine I may be doing myself a disservice if I just go in and offer at replacement cost. Any ideas how I could go about calculating if buying at replacement cost is still potentially overpaying for the property?

@Chuck Stagliano

Thanks for the reply. Totally agree and understand all of that. The issue for this property being, the actual NOI is negative. Seeing as how I can't expect the seller to pay me for buying his property, any advice on how to come to a value in this scenario?

Need some help from the community. I'm meeting with a broker to walk an off-market apartment complex here in Cincinnati. The property is in a downward spiral, so I think this could be a fantastic deal with great value add/upside potential.

The problem: I just got financials today, and P&L from 2015 and YTD 2016 shows a negative NOI. Since rule #1 of multifamily investing is to buy on actuals, and NOI/CAP = value, how should I go about calculating the value of this property? The asking price is significantly overpriced (priced off stabilized/proforma numbers), so I want to be able to rationally/credibly defend my valuation and potential offer price. Any advice is greatly appreciated...thanks!

@Scott W.

This isn't mine, but found a nice example online the other day when I was looking for something similar. Looks pretty comprehensive, so thought you might find some value in it.

https://www.biggerpockets.com/files/1203/download

Hope it helps!

Tom,

The key to success in RE is to become an expert in your particular investment strategy and your particular market(s). It does not matter whether you choose SFH, MFH, mobile homes, strip malls, or hotels...the true determination of your success is how well you know your strategy and your area.

Having said that, I would recommend examining your motivations for SFH. If your only objective is to generate a small amount of passive income without having to invest a lot of $$$ yourself, there are creative ways to do this across almost any investment strategy. Don't think that you HAVE to invest in SFH, but if that's what you WANT to do and plan to invest the time/energy to become an expert, I say go for it.

Hope this helps! Best of luck...

@Tyrell Perry

If NOI/CAP rate = Value, the only variables to affect value are NOI and CAP rate. If your NOI remains constant, any change in value would have to be driven by CAP rate expansion or contraction.

Think of it this way: a CAP rate = the amount of return an investor could expect on a particular asset (assuming an unlevered, cash purchase). Typically, low risk = lower expected return, high risk = higher expected return.

In our example, we bought the asset with $10,000 NOI at a 10% CAP ($100,000 purchase price). We increase the NOI from $10k to $15k but only able to sell for $90k (16.6% CAP). Even though we've grown the NOI, due to declining market conditions the asset is considered "riskier" than it was when it was first acquired. Thus, an investor would expect a higher return in the declining market condition than the initial purchase. To see CAP rates move from 10% to 16%, it would take significant negative impactors in the local economy (i.e. job/industry loss, population decline, unemployment growth, etc.)

In essence, when it comes to commercial assets, the market condition IS the CAP rate. A stable, high growth market will command lower CAP rates, while a riskier, slow growth market will trade at higher CAP rates.

Hope this helps!