BiggerPockets

Hi guys,

I've been looking into buying my first multi-family. This property is a 6unit. Without revealing the price, I'd like to know what the investors on this forum are willing to pay based on the numbers. I'm sure a lot of you have a general rule of thumb based on the income so I think that might help me make a decision.

Here it is:

Total Income $5,246 X 12 = $62,952

Separate Utilities

Approximate Annual Expenses:
Taxes: $9,829
Water $2,596
Insurance $3,030
Electric $463

Total Expenses $15,918

Gross Income -- Expenses = Approximate Net income $47,034

This is obviously based on the assumption that I pay cash and not borrow money, so what is a good starting point to make an offer?

What age is the building??

You don't have management fee in there,vacancy and eviction costs,your operating and expenses estimate is low,you have not set aside reserves for ongoing repairs and marketing.

You have no CAPEX going in for deferred maintenance needed going in right away for the property.

When a seller shows numbers like you posted above they are leaving expenses out or they have cut corners over the years with deferred maintenance to show that kind of return.

You are the one that will be stuck with the problem and overpay.

You didn't mention rent per unit.Is it 100% occupied??

At 100% occupied you have rent of 874.33 per unit.

Take 62,952 verified by schedule E tax returns and by checking bank deposits then half you get 31,296.

At a 10 cap going in that is 310,296 sales price before CAPEX. needed.

There are too many variables not posted by you to give an exact number.

As Jon stated, unless you have more detailed numbers, assuming that half your income goes to expenses is a reasonable estimate. So, at $300K purchase, you'd be earning about 11% on your investment if you hired out the property management. Personally, I'd want a better return, and would offer closer to $150-175K.

Capex is "capital expense" and refers to the bigger repairs that you'll have to make every several years -- like replacing the roof, replacing the HVAC system, replacing the water heater, etc.

Another issue you are going to run into is the the property is hard to finance. 6 units equals a commercial mortgage so your loan constant is going to be higher than it would be with 4 units. The bank's yield requirements are higher and thus you won't be able to bid as much.

Ray Alcorn has a great article on how to get pretty close:

Google search for Alcorn's article

Study that article CAREFULLY and use his procedure. That will get you within 10% or so. You can then round down and use some judgment to come up with a final bid.

The market for 4 units and the market for 6 units are very different and they are valued differently. I know that this is completely stupid, but it is what it is.

Financing for the 6 unit at that price is going to be less favorable than it will be for a 4 unit. The loan constant will be higher and thus YOUR bid will be lower.

No, I didn't mean you can afford to pay more with financing. A deal's a deal regardless of how you pay for it. I did mean that, everything else being equal, you can generally get a higher ROI with financing than with paying cash.

I think 6 unit buildings are a no-man's land. They're over four units, so no conventional financing. They're too small to get good economies of scale. They're hard to financing because the loan balance is small.