Commercial Value Add Valuation Question

2 Replies

I came across a value add 14 unit multifamily in an improving area of Chicago and i'm looking from some guidance as to how people have approached similar scenarios in the past.

Here are the details:

  • 14 unit; all 1 bed/1bath
  1. 50% occupancy currently
  • Deferred maintenance; definitely cosmetic and potentially structural too (can't tell from the listing)

The broker's asking price is based on the proforma cap rate based on what the property will likely generate once stabilized.  This seems pretty subjective and can vary greatly based on the rehab costs I feel. I've also heard guests on the BP podcast talk about submitting their offer based on actuals, but in a scenario where it's occupancy is so low, that also feels unrealistic. What are some way's people have actually approached situations like this?

The numbers:

Asking price: 995,000

"suggested" pro forma NOI - 143,599

My projected pro forma NOI once stabilized accounting for an 8% vacancy rate - 136,481 ( so fairly close)

My arbitrary, projected rehab costs max 20,000/unit based on the pictures provided- 280000

Based on my numbers, my more conservative cap rate came out to about 10.7% while the listed pro forma cap rate was 14.43% (substantially different). In fact, I can't even back into the listed cap rate unless I completely remove the rehab costs from my calculations and cut my maintenance cost in half.

SO, based on my calculations of not knowing all the details and maintenance needed, my max allowed offer would have to be 685K, a 30% cut to asking. My approach seems a little far stretched but somewhat realistic I guess if the seller is motivated enough, I'd just like to get some perspective.

Thanks,

Tony

Originally posted by @Tony Angelos :

I came across a value add 14 unit multifamily in an improving area of Chicago and i'm looking from some guidance as to how people have approached similar scenarios in the past.

Here are the details:

  • 14 unit; all 1 bed/1bath
  1. 50% occupancy currently
  • Deferred maintenance; definitely cosmetic and potentially structural too (can't tell from the listing)

The broker's asking price is based on the proforma cap rate based on what the property will likely generate once stabilized.  This seems pretty subjective and can vary greatly based on the rehab costs I feel. I've also heard guests on the BP podcast talk about submitting their offer based on actuals, but in a scenario where it's occupancy is so low, that also feels unrealistic. What are some way's people have actually approached situations like this?

The numbers:

Asking price: 995,000

"suggested" pro forma NOI - 143,599

My projected pro forma NOI once stabilized accounting for an 8% vacancy rate - 136,481 ( so fairly close)

My arbitrary, projected rehab costs max 20,000/unit based on the pictures provided- 280000

Based on my numbers, my more conservative cap rate came out to about 10.7% while the listed pro forma cap rate was 14.43% (substantially different). In fact, I can't even back into the listed cap rate unless I completely remove the rehab costs from my calculations and cut my maintenance cost in half.

SO, based on my calculations of not knowing all the details and maintenance needed, my max allowed offer would have to be 685K, a 30% cut to asking. My approach seems a little far stretched but somewhat realistic I guess if the seller is motivated enough, I'd just like to get some perspective.

Thanks,

Tony

Unless you intend to pay cash, CAP RATE is only important to compare investments. Listed CAP RATES usually don't include capital improvements or renovations. They do include maintenance expenses. So forget about trying to back into the listed CAP RATE. What's more important is for you to determine your own Return on Investment target. This means if you're going to finance the deal you have to include the cost of financing. Then you can determine your max offer.