Investor · Columbus , OH · Member since 2010 · 311 posts · 51 votes
Hi everyone
I went to check out a 4 unit multi-family today.
It's listed for $269,000
The rent/unit is $650.00
I check out the value on the auditors site and it value for $179,000
It was purchased in 2005 for $160.000
It was built in 1975
It's in a great sch district and 100% occupied
What will be the best offer price for this property?
I never feel confortable offering a price higher than the auditor value price but I feel offering close to 90k below the asking price may offend the seller (going by the price on the auditor's site)
The seller has done some renovation since he bought it(new roofs, new windows)
My question is " what is the best offer when the listing price is way too high than what it's value for in multi unit apartments?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
If by auditor you mean the county tax assessor then that number is pretty useless.
You should pay what its worth. Ohio appears to have no shortage of good deals. If this isn't one, I'm sure you can find one. Lets apply the usual assumptions of expenses being 50% of rent (read in the Rental property forum), 6% rate, 30 year term, 30% down. Lets assume you want to make $100/unit/month. Here's what its worth:
Rent: $2600
Expense: $1300
NOI: $1300
Cash flow: $400
Left for payment: $900
Max loan: $150,112.45
You should use that as your price, unless you're willing to invest your down payment for free.
Down: $45,033.74 (30%)
Actual payment: $630
Actual cash flow: $670/month, $8040 per year.
Cash on cash return: 17.8%
What if you use the $150K as the loan and bump it up for a 30% down payment:
Price: $214,446
Down: $64,334
Actual cash flow: $400/month, $4800/year
Cash on cash return: 7.5%
Yeech!
This place is only worth $150K. I highly doubt the seller will come off the crazy $269K price. If you were to pay that, with 30% down, your payment woudl be $1129 a month for a cash flow of $171/month, $2053 a year or 2.5% cash on cash return. Awful.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
If by auditor you mean the county tax assessor then that number is pretty useless.
You should pay what its worth. Ohio appears to have no shortage of good deals. If this isn't one, I'm sure you can find one. Lets apply the usual assumptions of expenses being 50% of rent (read in the Rental property forum), 6% rate, 30 year term, 30% down. Lets assume you want to make $100/unit/month. Here's what its worth:
Rent: $2600
Expense: $1300
NOI: $1300
Cash flow: $400
Left for payment: $900
Max loan: $150,112.45
You should use that as your price, unless you're willing to invest your down payment for free.
Down: $45,033.74 (30%)
Actual payment: $630
Actual cash flow: $670/month, $8040 per year.
Cash on cash return: 17.8%
What if you use the $150K as the loan and bump it up for a 30% down payment:
Price: $214,446
Down: $64,334
Actual cash flow: $400/month, $4800/year
Cash on cash return: 7.5%
Yeech!
This place is only worth $150K. I highly doubt the seller will come off the crazy $269K price. If you were to pay that, with 30% down, your payment woudl be $1129 a month for a cash flow of $171/month, $2053 a year or 2.5% cash on cash return. Awful.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Tracey, you use the "present value" function on a financial calculator or PV function in excel. In Excel, it might look like this:
Cell A1 is $900 (that's your payment)
Cell A2 is 6% (the interest rate, per year)
Cell A3 is 30 (the term, in years)
Cell A4 is =PV(A2/12, A3*12,-A1)
The result in A4 will be the $150,112.45 figure. Since you want the monthly payment, you have to convert the rate and term to months instead of years.
In Excel, the PMT (payment), PV (present value, i.e., the loan amount given a payment, rate, and term), and FV (future value, i.e., the loan balance after a certain number of payments) are your best friends. If you don't have excel, you can get a similar program for free at openoffice.org.
Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
16y
Might be worth running your numbers at 5.75% with 25% down. This is what rates were at for me this week on NOO residential rental property. Check with your bank before you make offers so you know what money costs you so you dont have to guess.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
I would really try to lock in a long term rate. Even if you have to pay an extra origination fee or a slightly higher rate. Rates might be similar five years from now. I seriously doubt they will be much lower. I there there is a significant risk they will be higher, possibly much higher. I was quoted "under 5%" for a 15 year fixed with one point on an SFR a couple of weeks ago. Maybe be a bit higher with a fourplex.
Investor · Columbus , OH · Member since 2010 · 311 posts · 51 votes
16y
Jon,
Am not sure what am doing wrong but for a 12 units that is rented at 759/month. If fully 80% occupied what will be the offer price using the 50% formular.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Hi, if you're going to make an offer, you might break the ice by asking the seller if they made any significant improvements to the property and have not repriced to a market rent level to support the asking price. Major improvements might not be picked up yet by the assessor. Many new improvements can be made with tenants there, in existing leases. If he says no, well the door is open to support your offer. Doesn't sound like it's really for sale, just hoping for that unknowing first time investor wannabe, but then that is not you since you're here on BP!
Bill
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Here's my analysis for 12 units at $759 a month. I'm going to use 50%, even though 20% vacancy is higher than is accounted for in the 50% rule. More on that below.
Rent: $9108 (12 * $759)
Expenses: $4554 (50% of $9108)
NOI: $4554 ($9108-$4554)
Desired Cash flow: $1200 ($100/unit/month)
Left for payment: $3354 ($4554 - $1200)
Rate 6.75%
Term 30 years
Loan amount $517,115.30 (PV (6.75%/12, 20*12, -$3354)
We'll use that as the price, and then buy it with 20% down
Down: $103,423
Loan: $413,692
Actual Payment: $2683.20
Actual Cash flow: $1870.80/month, $155.90/unit/month, $22,449.60 per year.
Cash on cash return: 21.7%
Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
16y
You might have to go to an area that is not really where you want to be to see the 50% rule w. $100 / door profit. I think the 50% rule is pretty good and use it often but do not expect $100 / door. I run my numbers with $25 / door and I pay myself to manage the buildings. It might take me more RE, but I end up making the same living as the section 8 guys who buy at a fraction of what I do but have to deal with the fed and local government more than I do.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
16y
Originally posted by Tracey Williams:
Thanks Jon,
Am wondering what seller use to arrive at their price because all the properties I have analyse today are listed way too high than my calculation.
Hopefully I willl find one that we work for me.
Sellers use the gummi drop (sp?) and pixy dust fantasy world numbers their criminal brokers use to get a listing from them. They often do not realize that the underwriting on the part of the broker is intentionally mispriced to get the listing!
If you are interested in learning more about the granular breakdown of the "50% rule" you can check out the studies put out by The Institute of Real Estate Management or National Apartment Association. Just do a Google search and you will find them fairly easily. 50% is really a little high on average...45% is closer with a variance of plus or minus 2%...but dividing by 2 is easier...and more conservative.
Class "C" units will generally have HIGHER than 50% expenses when you account for deferred maintenance and such. You should check into what the lenders you are working with allow for deferred maintenance to reduce your cash at closing and pop your COC, ROE, IRR, or whatever metric you use as a hurdle rate for the project.
Hope that helps some...
BTW...I 2nd Jon's philosophy with paying more for the debt to lock it up for a longer period of time. It will be well worth the small premium.
BTW2...Google Ray Alcorn's, "Deriving YOUR Capitalization Rate" and follow his methodology closely to underwrite the project correctly. Every investor has a different value for their equity contribution and your loan constant will be fixed for the project.
Mobile Home Investor · Spanaway, WA · Member since 2008 · 1k+ posts · 578 votes
16y
First rule of negotiation is that the first person to name a price loses. As an investor, you want the seller to name the price first. Ask them if that is the best they can do? They usually drop 1-2 times before you even name any type of price. Once you get their bottom line, you are in a better position to evaluate the deal to see if it will work for you!