28 UNIT VALUE-ADD OH ARV

9 Replies

I found a bank owned 28 Unit in OH. The bank wants to start at $350,000 (which sounds low enough to get me excited). I'm sure this will need significant repairs as it's completely vacant. I'm going to look at the property tomorrow. I'm guessing it'll be an $800,000 investment with PP and rehab costs. I'll know more after tomorrow. 

If we did a deal like this I would want to use private capital (short term money) complete the rehab and get the rentals rented in 12-18 months and then get a bank portfolio loan. So you can imagine the importance of getting the ARV right on a property of this size.

I've been calling local commercial appraisers but the have been very unclear on what the market's cap rate is to determine the ARV. What measures do you all take to make sure you all come in at the right numbers for your ARV when you do an 80% LTV with the bank?

My largest deal is 8 units. My local bank said they'd do a deal of that size on a portfolio loan 80% LTV. I would certainly figure out all of those specifics first, but right now I'm just trying to find a good place to start to determine the ARV. Since I haven't done one of this size I'm not familiar with the comps and cap rate for my market.

@Lauryn Meadows

The problem is, on smaller apartment complexes like that you can't really be sure how the ARV will come out especially if it it's in a smaller town. Appraisers will do what they'll do. I had one appraiser use an 11 cap on my apartment complex in 2017 even though I would be perfectly happy to buy anything at an 8 cap that came on the market in the same area. It's subjective.

The best you can do is to evaluate it yourself based on the 3 factors and appraiser should use.

1) Income approach - project rents and NOI and use a cap rate you feel appropriate to the market.

2) Comparables - look for anything similar sold in that area or surrounding areas.

3) Replacement - if you're essentially rebuilding it look at the cost of new construction.

Ask 2 or 3 commercial agents / brokers in the area what the going cap rate is for stabilized multifamily deals in that specific area.  Take the average of what each agent / broker tells you and use that. Ask specifically for cap rates on deals that closed within the last 6 months.  

Once you have the cap rate, ask those same agents / brokers for multifamily rent comps that are comparable to the asset class you are targeting. Once you have the cap rate and know what the stabilized rent roll will look like, you can determine the NOI, assuming you know what you're general expenses will look like. From there you can determine the stabilized resale value.

I'm happy to go more in-depth and walk you through the entire process.  Feel free to directly connect with me.  

This is great info! Thank you all! We ended up looking at the apartments and it's a huge undertaking for us at this point. A lot of vandalism on the inside has taken place. It looks as bad as some of the flip houses I've been in but at 25,000 sq ft. I'm still going to do all of these things though for when we find another deal.

Rehab depends on unit size.

Completely vacant can take the most work. A big thing is the city or county might want all new everything to do the reno. So for example since it is gutted they might now require sprinklers in all of the units which is a huge cost. You might have an old cast iron sewer line to the street and galvanized water line. If it is lead paint on the inside the remediation could be huge.

In some cases if density levels have increased for zoning the answer might be to tear it down and build new. I have seen some people think rehabbing an old building was cheaper but after many problems they would have came out cheaper building new. 

There are investors that buy a lot of these vacant buildings but they have crews working full time to keep costs down. I remember as a one off property bids came in at 10k a door for reno but this investor could do it for 7k a door because of the volume he did saving on labor and materials. That's 300k saved on 100 doors. Some investors just think of interior costs per unit and the outside runs up their per door costs big time. You could have windows to replace, roof, siding, sidewalks, underground utilities, dead tree removal or trees to tall or close to buildings, parking lot replacement or repair, amenities to add or replace, etc. The list can go on and on.  

@Lauryn Meadows Since this is a commercial deal, I believe calculating the ARV should be pretty straight forward. First, determine what market rents and vacancy rates are in the area for comparable units. Then, calculate NOI as accurate as possible with what you know. Finally, use CBRE's 'Multifamily Cap Rate Survey First Half 2018' report to determine what cap rate stabilized properties of similar class are trading for in your area. Finally, divide NOI by cap rate and there you go. 

Best of luck. 

@Joel Owens, thanks Joel! You are 100% right. I think it'll cost more to renovate these two particular buildings than it's ARV. I believe it'll be cheaper to build in my market.

@Larry Hawkins, thank you! I'll utilize this so I'm up to date on future deals.

Hi Lauryn,

First, you need to determine the NOI once the property is stabilized. Since you have an idea of the renovation costs, I am assuming you also have an idea of the type of renovations you will perform. You want to perform a rental comparable analysis to determine what the rents will be based on these renovations. Find properties that are similar to your stabilized property, not how it is now, calculate the rent per square foot, and assume you will achieve a similar rental amount. Then, subtract out all of the expenses to get the NOI.

Similarly, you want to determine the cap rate that will be used. Speak with a few commercial real estate brokers, explain your business plan, and ask them what they think is a ballpark cap rate assumption to use. It is impossible to know for sure, because know one can predict cap rates 12 to 18 months out. So, I'd add 20 to 50 points (0.2% to 0.5%) just to be conservative.

Then, divide the NOI by the cap rate to get an estimated ARV. At this point, you want to make sure that 80% of the ARV is enough to pay back the private lender with interest.