How to properly offer a fair value of a multifamily apartment

Question

I am interested in a purchasing 7 unit apartment which is listed for $1.6 million with cap rate 4.40%. $136,500 annual rental income based on the marketing material which average about $1625 per unit rent monthly.   Upon my underwriting based on actual numbers the annual rental income is $120K with as all 7 units bring in different income per month some are $1625, $1100, $1250 etc.

This is a class B property in Class A area.  Seller has renovated all the unit and invested over $20 to $30K with the renovation.  This is a turn-key multifamily meaning the new owner will not have to do anything except for raising rent.

What do you guys think?

Andrew Hogan · Answer

Hi @Bhairav Bhavsar, A crucial piece of info is the location. Class A neighborhood of... Tampa, FL?

Brad Hayden · Answer

@Bhairav Bhavsar -- seems like you need to answer 3 key questions:

1) What is it worth today (as-is)?-- actual rental income-- operating expenses -- these should be based on your operating/management structure and you will need to be able to explain why they might be different from the current owner-- current market cap rate for a renovated class B property

2) What is your investment strategy and exit plan?-- How will you strucure the deal?-- what will the capital stack look like?-- what are your investment metrics?

3) Will it be a good investment?You say it's turn-key and all the new owner has to do is raise rents. The flip side of that is … raising rents will be the only opportunity to increase revenue and increase value over the next few years. -- How far will that really go; how much room do you have compared to competitive market rates? -- What is market supply and demand?-- Will revenue increases keep pace with expense increases? -- What are the potential risks to cash-flow and how will you mitigate them? -- What will cash flow and value look like 3-5 years from now?

Good investments are made before the closing.

Chris Mills · Answer

@Bhairav Bhavsar This is a pretty straightforward deal. Is it a good deal for you? That's the question. If you stick with that cap rate, and make an offer based on your calculated NOI, can you live with that? If all you as the new owner can do is raise rents, you're stuck, which can be a dream or a nightmare. If rents don't go up, or go up much, are you good with it?

Vessi Kapoulian · Answer

You have received great feedback thus far. I would also recommend to firm up:

- Loan terms. With the recent volatility in the market, I am seeing rates go up and other loan terms tightening. If the deal still works with tighter lending terms, then that is a positive.

- Expenses (to account for inflation), especially insurance.

Bhairav Bhavsar · Answer

@Chris Mills and @Ronald Rohde Thank you both.

I think this property will definitely increase value in the future as it is a good prime location and lots of development over $3 billion approved and being built.  Rents on few units are definitely below market which can be increased.  I might be able to increase NOI by charging extra for storage units and adding more storage units in the back of the building, I can also add a grilling station as an amenities for tenants to cook out etc.

After seeing the property and the unit, this is a good property.  Based on the current rental income today, I think this property is worth $1.2 Million but I doubt he will go that down as asking price is $1.6 million as he did a renovation in all the unit so he forced appreciated the value.

Bhairav Bhavsar · Answer

@Brad Hayden Thank you for your reply.

1. The cap rate for multifamily in B class property is between 4.20 - 4.54% Cap rate

2. Investment strategy is buy and hold for long term.  The deal will be 100% financed with 1 year 4% interest only payment and after that 30 year amortization for 30 yrs with 4% interest rate.

3. The market rent is $1625 in the area so 4 units are below market rent.  Those 4 unit can be increased to $300+ for each unit to market rent.

Bhairav Bhavsar · Answer

Thank you everyone for a the valuable information.

Ronald Rohde · Answer

I think its a good deal, do you believe rental rates will continue to grow? Will you be able to increase NOI, then flip it?

Does it align with your investor goals?

Bhairav Bhavsar · Answer

Yes in Tampa, FL

How to properly offer a fair value of a multifamily apartment

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