As the market is heating up - at what point is it OK to overpay - or is it ever?
Here is a potential deal - Two 8-unit Buildings for sale - the numbers of each are pretty similar so I will do it for just 1 of the Buildings. This one has a new roof, and 3/8 units are rehabbed:
Asking Price: $495,000/each (Price/Unit - $61,875)
GOI: $79,200 (rents range from 750-850/month)
Expenses: $28,532 (he does PM himself - this includes a 5% vacancy and 8% in repairs)
P&I: $1,881 (25% Down - 4.5%) - Annual Debt - $22,572
CAP - 10.06%
COC - 20.73%
GRM - 6.31
DCR - 2.21%
*On the same street, an 8-unit sold for only $310,000, & a 12-unit for $455,000 in 2016.. Definitely needed updates - not turnkey like this one. Rents are only $675/month (potential to raise rents though!), and the cap rate/COC/DCR are all still pretty similar to the numbers for this unit. Moving further out from this unit and the GRM's are closer to 6.
What are your thoughts? Would you do the deal? Or is his asking price way out of line?
Hi Lauren. First and foremost, you have to set a number that allows the property to cash flow at a number you are comfortable with regardless of the list price. After that, I'd look at the ask price and see how high or low it is compared to recently sold properties. If the seller is asking for almost 500k per property and the closest comp is 310k, something is wrong. Will an appraisal even support that price?
Overpaying by a few thousand is one thing, but almost 200k is something I personally would not be comfortable with unless the ROI was ridiculous. Real estate has been, and always be a numbers game. Make sure the numbers work and then determine if you can get the property for the numbers that work for you.
Thanks @Bob Okenwa - The 2 others on that street have a GRM that is closer to 5, and then when you go further out in the area the GRM goes up to 6-6.85.
I don't know why the other unit sold for only 310K - doing the NOI/Cap Rate put the market value closer to 400K - it is such a big difference!
When I do the NOI/Cap Rate for this unit - puts the purchase price at $500,000 - in line with his asking, but so far off from the other 8-unit.
Regardless of if he does his own PM, make sure you factor that into your calculations. If you do that I'm guessing the value would go down
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