I would figure out the NOI first. Gross doesn’t mean much if your expenses are high. Figure out your cap rate of your current properties and if you are comfortable with that cap rate, multiply it by the sellers NOI, this should give you a purchase price that is fair to you and most of all, you can explain how you came up with it. Just make sure the NOI for the last two years is accurate and verify any deferred maintenance.
It is really hard to say of off just gross numbers.
Have you listened to yesterday's podcast yet? It is on negotiating and one of the rules he gives is to not give the number first. It really is worth the listen if you are considering making an offer soon.
@Dustin Hood Great advice on offer. Since you have a pre-establised relationship with the seller, try getting the T12, rent roll, leases and bank statements (essentially, however much information you can get). You are trying to piece together a financial picture for the properties.
For instance, most investors estimate 50% expense ratio. But that is dependent on multiple factors and an average. In your particular case, the expense ratio might be grossly under or over-stated. If the properties were self-managed, mom and pop owners do not include property management fees. You should be accounting for them when underwriting. Even if you plan on managing the properties yourself, your time has value! Expenses could be overstated because they are out of control or because rents are not up to market, hence, reasonable expenses in comparison look high. In contrast to multifamily, self-storage usually does not have high expenses (run between 25-40% of revenues). If there are vacancies you could offer the tenants in 8 and 4-plex incentives to start renting those units from you (don't count on it).
Once you have a financial picture and can provide us with some more #s, the BP community can provide more detailed perspective.
Best of luck!
Thank you guys for the responses and advice. After crunching numbers, the NOI over past 2 years is approx $80,000/year. I do have a relationship with the seller, so it's going to have to be a good deal for both of us. I know the 8plex and 4plex will stay rented based off rental history in my area, but this is my first storage unit purchase and worry a little about keeping 55 storage units full.
With the NOI sitting around $80k, what'd y'all thoughts on purchase price? Not looking for the final offer number, just somewhere to start. Thanks again.
NOI divided by Cap Rate is the formula for apartment buildings.
I don't know a thing about the storage business. I would use the search function and see if you could track down people or blog posts who might be in that business and can help you out.
I have replied to and have written several threads on valuation here on BP. If you do a search for my name, you'll see dozens of them.
Here's the skinny: Now that you have an NOI, dividing it by an acceptable cap rate for the property will get you in the Ballpark.
Now, what's acceptable? As you know, it varies based upon the market, and the property - A, B, or C. Right now, we're using a 9.0 - 9.5% cap rate on trailing 12 financials to arrive at an approximate purchase price, all things considered for the Class C Properties we're pursuing. Assume an 8.0 to 8.5% Cap for a Class B.
And Before all the Novices start challenging me on this, there are a LOT of factors, and many variables to consider before simply drilling down to 1 Number: DO you have ALL the income and expenses accounted for in the NOI, is a 9% cap the true value, or do you start by offering an 11% cap for negotiation.....
So, without a 15 page discertation, (that's why I wrote my course) I've given you the ball park to get you close.
I would want at least 8 cap on the apartments and at least a 10 on the storage units, so seperate out the noi's and math accordingly. Storage units have higher risk, as they are usually easy to replicate, and keep in mind with all the retail space going empty, how easy it will be to convert some of that to storage! see if she will hold some financing which can be win, win.
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