Is my realtor right or am I? Analysis critique!

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Is my realtor right or am I? Analysis critique!

Wendy Carpenter
Yelm, WA · Member since 2017 · 120 posts · 84 votes

I want to make sure that I’m not missing out on something/a good buy. I’ve looked at it 10 ways, and I can’t see where I’m missing anything.

My realtor sent me a canceled listing and told me that the owners had wanted 300k for it, but now would take 250k for it because they are wanting to invest in something else. She told me that the numbers now made it an 8.6 cap rate. I ran the numbers on my own and I got wildly different calculations.

4 units are 2bd/1bth and rent for $550
1 unit is 3 bd/2bth and rents for $675

Total rents of $2875

Owner pays some utilities at a cost of $8,800/ year

Here's what I got running it with the BP Rental Calculator (as self-managed):

-Purchase price of $250,000 (I did estimate of $300k ARV price)

-25% down: $62,500

-Amount financed: $187,500

-4.5% interest: P&I of $1,042.19

-Capex: 7%: $201.25/mo

-Maintenance/repairs: 7%: $201.25/mo

-Vacancy 5%: $143.75/mo

-Property taxes: $191.67/mo

-Utilities: about $733.33 mo

-Insurance: $220/mo

NOI of $14,209

Income $2,875.00 - total monthly expenses (including debt service) $2,733.10 = $141.90/mo cash flow and 2.64% COC with a purchase cap rate of 5.68%.

I told her I must be missing something, and she asked if I "had the NOI at $21,662?" So, as far as I can tell, she is only doing her calculations by the straight "expenses" of taxes, insurance, and utilities, and not accounting for any kind of vacancy, cap ex, or maintenance. I think that's the only way she got a cap rate of 8.6. I put the cap ex and maintenance at 7% due to the age of the building (1955). Keep in mind, this area is definitely for cash flow and not for appreciation, it's quite stagnant.

Is is just me or is the price of 250k on this definitely NOT a deal? I think she’s also wanting me to look at the potential rent increases (they are all below market), but everything I read says to only buy on actuals, never on possible projected numbers!

I told her that I would maybe offer them 200k (and that would still be only an “ok” deal) and her response was a prompt “they wont take 200k.” So I told her “that’s fine, we’ll just have to keep looking!” I don’t think she appreciated my polite challenge of her analysis. I’m also suspecting that she represents the seller of this property as well, and was wanting to sell this to me so she could sell them something bigger....

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
8y

Capex is not a factor in cap rate. NOI divided by the properties value is the cap rate.

On a 5 u it building with yearly rents of $34,500 and a sale price of $250k I would expect a cap rate to end up around 9%.  Without knowing the prevailing cap rate in the area, I would say their current asking price is very appropriate.

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  • Brian Schmelzlen
    Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
    8y

    Even if your realtor is right (and I agree with your numbers, but I am new to that analysis), I like the advice of "if you are not embarrassed by your offer, you are offering too much".  Don't offer a penny more than you are comfortable with, and if the sellers' don't like the offer then move on.

    Also, it is fine for your realtor to give you honest feedback, but if she isn't your advocate when negotiating the deal you might want to find a different realtor.

    5Reply
  • David Roque
    Investor · San Diego, CA · Member since 2012 · 100 posts · 37 votes
    8y
    I did your calculation as specified, I got 5.68% cap. Here is what I would suggest, even though you are self managing, still include management cost. Second, determine the IRR as this would be a better indication of return given a specific holding time.
    2Reply
  • Gregory B.
    Brooklyn, NY · Member since 2017 · 68 posts · 28 votes
    8y
    Your doing a pro forma while she is likely calculating actual current NOI. You will want to look at several years of financials to understand what is going on. If there were no vacancies or capex this year her cap makes sense for 1 year... you use your numbers as leverage to lower the price. If she’s the seller realtor she’s going to calculate it a more favorable light the. You as the seller... valuation is all an art
    0Reply
  • Wendy Carpenter
    OP
    Yelm, WA · Member since 2017 · 120 posts · 84 votes
    8y

    @Brian Schmelzlen, I read and loved that advice too! Just based on the numbers at face value, a 200k offer wouldn’t be embarrassing either! I was thinking that same thing about not being my advocate, but I’ve had a helluva time trying to find an investor friendly realtor in the area! I couldn’t find one on recommendation, and then none I cold called would even return my messages! 

    @David Roque, good idea on the self management calculation. Can you expand a little bit on what you mean about the IRR?

    0Reply
  • Wendy Carpenter
    OP
    Yelm, WA · Member since 2017 · 120 posts · 84 votes
    8y

    @Heather R.

    0Reply
  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    8y

    @Wendy Carpenter 

    your calculations make sense to me. What Cap Rate do small multi's go for in your area? Even though Cap Rate isn't that useful in determining what a small property is worth since vacancy can have a large impact on the NOI, it would be useful to see what others have sold for. Another option to value the property is to project the NOI at increased rental rates, but use a higher Cap Rate to discount the fact that you'll need to implement these changes. Third, and more likely option, is to walk away since you returns will be so low.

    @David Roque has great advice about the IRR and PM line item. Do you know when the last time the roof and HVAC were replaced? On a house this old are most certainly on your second, possibly third roof. You may also need to factor replacing those into your IRR calculation. Its important to know when they will need replacing and if you'll have built up a large enough CapEx reserve to cover the cost or if it will eat into your cash flow.

    0Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    8y

    That's not a deal. $2875 in rent BUT with utilities included it's really only $2142 in rents. 

    Never trust someone's analysis who isn't an experienced investor AND/OR has vested interest in selling the property. 

    3Reply
  • Wendy Carpenter
    OP
    Yelm, WA · Member since 2017 · 120 posts · 84 votes
    8y

    I sent her a pdf of my BP calculations and she first told me that my vacancy was too high, and I replied with “5%? Because there’s bound to be turnover at some point, not necessarily what it is now.” and to that at least, she replied “your(sic) right” She didn’t have any other comments (at least to me over text!) on my numbers. But it doens’t sound like she believes they are accurate.

    I had read that some realtors will throw bad deals at you to see if you are educated enough to know they are bad and/or to see how serious you are about buying. Any truth to that?

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    8y

    Capex is not a factor in cap rate. NOI divided by the properties value is the cap rate.

    On a 5 u it building with yearly rents of $34,500 and a sale price of $250k I would expect a cap rate to end up around 9%.  Without knowing the prevailing cap rate in the area, I would say their current asking price is very appropriate.

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  • Wendy Carpenter
    OP
    Yelm, WA · Member since 2017 · 120 posts · 84 votes
    8y

    @Bill F., cap rates seem to be around 6-8. However, part of the big problem is that there's very low inventory in this area. Only a handful of multi families on the market in any size and so there's also not a lot of comps. Additionally, there's quite a few factors that can impact pricing there: I've seen out of area/uneducated investors buy properties for 50% more than they should because they didnt do their homework and find out the flood zone will screw them now and forever. Good idea on the NOI and higher cap rate, I'll have to run that.

    Regarding the replacement of rood and HVAC, she had mentioned to me previously that the current owner “has done some renovations,” but she did not say what exactly. But yes, that would be hugely important to know if I would have to replace those big ticket items in the next couple of years!

    @Austin Fruechting, you are totally right with that statement. She has around 16 doors herself in the area, but she has paid cash for most of them partly because of her husband’s well-paying job and then the result being the rentals cashflowing each other. She didn’t tell me that she represents them (I know for sure her agency had the listing before it was canceled), but the way she worded everything in discussing the property, I would bet she is their agent now. I am now giving her major side-eye. Like I said in my other comment, it’s difficult, because I have had the hardest time time finding an investor friendly realtor at all in the area!

    0Reply
  • Rick Baggenstoss
    Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
    8y

    @Wendy Carpenter  I suggest making an offer.  You shouldn't talk yourself out of offering (or let your agent).  You'll be amazed at the deals you're able to strike because you tried when nobody else would.  

    Also, any opportunity for adding/losing value?  Sounds like you're only looking at numbers. 

    1Reply
  • Wendy Carpenter
    OP
    Yelm, WA · Member since 2017 · 120 posts · 84 votes
    8y

    @Russell Brazil, I'm a little confused....yes, the rents may be $34,500, but that's not the NOI? From everything I have read here and elsewhere, that the NOI is really what you base your value off of...? Feel free to correct me if I'm wrong, I want to be sure I'm not misunderstanding the things I'm learning! :)

    I’d say cap rate for the area is 6-8. 

    0Reply
  • Wendy Carpenter
    OP
    Yelm, WA · Member since 2017 · 120 posts · 84 votes
    8y

    @Rick Baggenstoss, I was absolutely wiling to make them an offer based on my numbers, so I told my realtor that I would offer them 200k and she replied immediately with “they won’t take 200k.” 

    Yes, you’re right, I am looking just at numbers, but at this point, that’s kind of all I have to go on? I ran those numbers without accounting for any kind of renovations on the property. I could get a reasonable return if I raised the rents significantly (200-250 more each unit and that is what the realtor said she thinks is market) from what they are now based on a 250k purchase price. However, if I put a lot of money into reno, I think I would be back to where I was with my numbers. 

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    8y
    Originally posted by @Wendy Carpenter:

    @Russell Brazil, I'm a little confused....yes, the rents may be $34,500, but that's not the NOI? From everything I have read here and elsewhere, that the NOI is really what you base your value off of...? Feel free to correct me if I'm wrong, I want to be sure I'm not misunderstanding the things I'm learning! :)

    I’d say cap rate for the area is 6-8. 

     Operating expenses if run properly should be about 35% of gross rents on a small building like that giving you roughly a 9% cap rate.

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    0Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    8y

    @Wendy Carpenter - I don't look for an "investor friendly realtor" or a realtor that invests. I only care about my own analysis. I just find a trustworthy, competent realtor, tell them what I'm looking for and have them set me up with automatic alerts when a match hits. I get an email when any multifamily property hits my market, and I check zillow for any new single family houses to see if there's anything there that could be a good value add rental. Without automatic alerts (I don't know if it's the case), but I would worry that if they're investors they would just cherry pick the great deals and I would never see them. Or that they don't know enough and may miss something that could be a real deal. I want to see everything that hits and be the one deciding what's worth it to look at, not them.

    Even if she's not representing them, I'm sure she'd get a commission representing you, so she's still vested. 

    3Reply
  • James W.
    Minneapolis, MN · Member since 2017 · 353 posts · 223 votes
    8y

    I wouldn't purchase it on the assumption that you might be able to raise the rents.  It would likely lead to more work in finding some new tenants as well.  

    it probably would be worth your time reviewing rents yourself without her assistance if you are seriously interested.  Maybe there is a good reason why the current owner hasn't raised them.

    1Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    8y
    Originally posted by @Russell Brazil:

    Capex is not a factor in cap rate. NOI divided by the properties value is the cap rate.

    On a 5 u it building with yearly rents of $34,500 and a sale price of $250k I would expect a cap rate to end up around 9%.  Without knowing the prevailing cap rate in the area, I would say their current asking price is very appropriate.

    25% of the rent is for the utilities, so the rent is actually much less than that. So the rents are effectively in the $400's... expenses as a percentage are going to be very high on rents that low. 

    4Reply
  • Wendy Carpenter
    OP
    Yelm, WA · Member since 2017 · 120 posts · 84 votes
    8y

    @Austin Fruechting, I have auto alerts set up from 3 different realtors (I look in several different areas, but 2 of those areas are so hot right now, that even the bad deals are pending within 24 hours), and I’m super neurotic about checking listings about 100 times a day! Hah Of the 5-6 brokerages I called in the area, this is the only one who actually called me back. I definitely look at everything in this area, there’s just currently only 4 multifamilies for sale and at least 3/4 are not even ok deals! 

    @Account Closed, yes, it’s kind of in the sticks, not in the city I live in (but also below market at prob 900/mo). Out here, we don’t get multis in the low numbers like other areas of the country. But, from what I can see on the streetview of the property, the 3bd/2bth is a weird, ugly looking block building kind of awkwardly built off the back of the fourplex. 

    0Reply
  • Wendy Carpenter
    OP
    Yelm, WA · Member since 2017 · 120 posts · 84 votes
    8y

    I've been basing my analysis on the assumption that I won't be able to increase the NOI, so I won't get distracted by a potential shiny object, and forget that it would be projection, not current actuals.

    My due diligence would include looking for ways to increase the NOI, but from everything I have learned, I have been operating with the mindset of "I'm not paying for anything that isn't already there," e.g. rent increase, expense reduction from RUBS, etc.

    Is that not how I should be looking at my analysis and offer standpoint? 

    1Reply
  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    8y

    @Wendy Carpenter How you decide the value the property is up to you. If you decided to go with the 'I value what's there' you COULD miss out on some value add opportunity.You could run more than one model to give you another perspective on the value of the property. It seems like you know that over optimism is a risk so you'll be less susceptible to that behavioral trap. Taking a lot at price per square foot could give you another metric. 

    After running the numbers with PM and without CapEx you'll get an NOI of around $13k a year, which gives you a 5.3% Cap Rate and an expense ratio of 38%.

    Based on your market research, what could you raise rents to?

    1Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    8y

    @Wendy Carpenter lots of Realtors I talk to and plenty of investors don't factor in vacancy, Capex or repairs. This is a huge mistake because these things WILL happen. I had a buddy lose a place because he didn't factor this stuff in.

    I think you're right with your analysis. Make an offer based on what works for you.

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    2Reply
  • Wendy Carpenter
    OP
    Yelm, WA · Member since 2017 · 120 posts · 84 votes
    8y

    @Bill F., you are very right on that. The way I look at it, is if I was in an area where I saw more growth and appreciation happening, I would be more inclined to bank on the possible rent increases. I'm trying to stay a bit conservative with my future predictions for this particular area. In going with the lower end of the market rate, if I upped the rents from on the 2 bed units forms 550 to 700 and the 3 bed from 675 to 900, that would give me an income of 3700/mo. I'm also keeping in mind that increasing the rents that much would very likely take time. So with those increases, I would get a cash flow of $810.15, a COC of 15.07%, and a cap rate of 8.89. Because I'm looking for cash flow (a lot of that because I will be bankrolling a portion of the down payment with my HELOC, but also because of low appreciation for the area), I want to ideally see $200/mo per door. However, that is a good jump in the COC and cap rate, so maybe I should be looking more at those here?

    One thing about the analysis as actuals, is that the debt coverage is only 1.14. My lender wants 1.25, so I believe they would reject it based on that low DCR anyway?

    0Reply
  • Carter StillPro Member
    Realtor · Oklahoma City, OK · Member since 2017 · 29 posts · 11 votes
    8y
    What number definitely works? Offer that. Sounds like your analysis is solid. Long story long about realtor relations: I'm in a less competitive market than most, but not being able to find a supportive realtor is foreign to me. In my opinion, a pro should never influence your offer unless their experience tells them you will lose out on the deal. My realtor is an experienced REI herself. She does wince on low ball offers, and even today said, "they won't take that", but at the end of the day she drafted the offer I asked for. They didn't take it, she was right, but I learned more about the seller and I haven't given anything away. I'm also confident that in a situation where she has private information from the buyer and the seller, as you might be dealing with, that she would just facilitate the negotiation and transaction without nudging either party. If you're checking listings 100 times a day then it sounds like you're already doing a lot of the work. Consider grabbing a newbie realtor who's hungry, have them let you into places/fill in the blanks in a solid contract, and trust more in yourself for decision making. For numbers, I like to use BP calculators, my own, simplified excel calculator, and then a good reality check to make sure awesome numbers (or not so awesome numbers) make sense for the area.
    1Reply
  • Jay Helms
    Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
    8y

    Hello @Wendy Carpenter Is your realtor trying to sell you a deal? Yes, that's their job right? To make transactions occur and to push the market, right? They did give you a nugget of info that the current owner is wanting to make another investment now...sounds like they will be slightly motivated.

    It's possible I misread your post but it appears you included debt service in your NOI calculation, which debt service is not an expense included when calculating NOI.

    Here's how I calculate NOI:

    • NOI = $2,875 - $191.67 - $733.33 - $220 = $1,730 x 12 = $20,760

    At the 8.6% Cap Rate suggested by your realtor, that's $241,395. So now, let's look at Cash Flow. Debt Service on the property $241,395 @ 25% ($60,348) down is $181,047 or $906/month.

    • Cash Flow = $2,875 - $191.67 - $733.33 - $220 - $201.25 - $201.25 - $143.75 - $906 = $277.75/month...on 5 units...

    Because I focus on cash flow, this property doesn't initially pass my napkin test but if its under market rents, it might be worth digging into more. For example, the utility expense sticks out, seems extremely high (also will want to verify this includes trash). Does the state where this property is located support RUBS? If so, you can bill back water/sewer consumption (increasing the NOI and cutting one of your largest expenses) but you'll want to see if that's common practice with your competition and ensure rents line up as well. Also keep in mind property management expense isn't calculated here as well as you mentioned self managing.

    In regards to the potential property #s, one expense I don't see is lawn care/maintenance. If that's not the tenants responsibility, that is additional expense need to be considered. 

    2Reply
  • Rick Baggenstoss
    Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
    8y

    @Wendy Carpenter  I would not accept your agent's opinion of how the buyer would respond to your offer.  I would make a written offer thru your agent (or another, if need be) and include your analysis of the value/cap rate.  You'll be surprised how compelling your rationale/insight can be on getting a fair price.  

    A year ago, I bought a house for $150k.  It was listed for $200k.  The seller was an agent/broker.  All I had to do was provide a good list of repairs and waive due diligence.  They had several full price offers that fell out of contract during due diligence.  It took a couple of weeks to negotiate the contract.  This was in Atlanta -- a very hot market.  

    Ask your agent if they will submit your offer and represent you well OR do you need to engage another agent.  I think you'll get a positive response and the agent will 'sell' your offer to the seller. 

    2Reply
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