evaluation of multifamily property
Hi BP!
I am an investor from Israel and recently had an offer to join a syndication for a buying of a multifamily unit in NJ. The offer sounds tempting since the group has to finance about 3M$ (the rest comes from a bank with a low interest) and the building is bought about 1.5M below value, so when we sell we should expect a 50% return when selling which should be 3 years from now.
The thing that bugs me is the way the building value was evaluated, i am copying a section from the presentation:
"Market activity has shown similar properties consistently trading in the 4.75-5.25% cap range (refer to “Comparables” slide for specifics). Using this approach, keeping with
conservative rent growth and vacancy assumptions, and factoring in the fully matured real estate tax amount post-abatement, the Y1 projected cash flow of $570,561 ($670,561
adjusted down $100,000 to account for the fully matured RE taxes) would value the asset at roughly $11.4M at a 5% cap - a substantial savings from our purchase price of
$9.8M. This evaluation is further supported by a recent CBRE pricing opinion of $11.5-12M"
What they done is evaluate the price by assuming the return is 5% annual. From everything I know about US RE the returns should be much higher, but maybe certain markets has lower returns. What do you guys think?