What would you pay for a 10 apartment + 3 commercial unit multifamily?

[Karolina Powell]

I'm trying to figure out how the seller is coming up with their figures.

What would you pay for:

Multifamily in a small town, low appreciation potential, 3 commercial storefront units and 10 apartments.  8 single bedroom and 2 double bedroom.  Historic building with slight cosmetic updates 

101,000 gross

54,000 NOI

Two empty spaces that can be used for laundry or made into another apartment.

[Austin Beveridge]

Depending on condition: $765,000 - $900,000

[Karolina Powell]

Quote from @Austin Beveridge:

Depending on condition: $765,000 - $900,000

Thank you!  Do you mind walking me through how you came up with that?

[Austin Beveridge]

6% Cap => $54k/0.06 => $900k

Then I'd bake in 15% buffer for repairs => $900k*.85 = $765k

[Karolina Powell]

Quote from @Austin Beveridge:

6% Cap => $54k/0.06 => $900k

Then I'd bake in 15% buffer for repairs => $900k*.85 = $765k

Thank you!

[Evan Polaski]

@Karolina Powell, if you are going to make investment decisions based on someone saying a small market property is worth a 6-8 cap rate, do I have some things you will want to see...

Everyone should have a general rule of thumb, and Austin may be correct, or he may be way off.

Mixed use can be hard to value in any area unless there are other trades.  When I hear "small market" I think 8-10 caps, but maybe my small isn't the same as yours.  But the bigger thing I see is physical condition.  Roof, sewer lines, condition of commercial space, condition of apartment units, windows, HVAC system.

Are storefronts occupied? Who is tenant? What is term of lease? What is general demand for storefronts in the area? An occupied store front in a small town will factor into your current NOI, but if they go vacant in less than a year, you could be looking at a couple years of vacancy in a small town.

And lastly, with limited appreciation potential, a 6 cap sounds low.  Without appreciation, your entire return is cash flow, and buying at a 6 cap with little to no real upside, means you will be making 6% on the deal.  I would rather go into a money market at 5-5.5% with no management and basically no risk, than buying real estate to make 6%.

[Sam Applegate]

@Karolina Powell, I agree with @Evan Polaski's analysis. A 6 cap feels thin for a small market. Especially when factoring in commercial spaces.

One aspect of the deal I'd consider, is whether you can individually parcel the commercial spaces and sell them to the businesses. This allows you to own/operate the multifamily (assuming you don't want to own the commercial) while potentially creating some value in the sale.

[Karolina Powell]

Thank you everyone!  I agree that 6% where this is is low but it looks like the seller is using 5.5%.  I'm thankful to understand how the seller is arriving at their numbers.

[Gino Barbaro]

@Karolina Powell

Have you asked them how they derived a price? I'm not a big fan of one beds, and the commercial has to be underwritten at higher cap rate than the commercial.

Historic sounds like a lot of deferred maintenance. What is the cap rate in your area?

This building needs to be checked out to see if it has all permits to have 10 units and 3 commercial storefronts. And do due diligence to see what the empty spaces can be converted to. Is there means of egress?

54,000 at an 8 cap is $675,000. Seller probably not going to like reality. You buy on pro forma, but you borrow on actuals. This deal sounds like a seller financing opportunity.

Good luck

Gino

[Alecia Loveless]

@Karolina Powell Without any method to back me up was going to say $750,000-$800,000 in my area based on the prices I am seeing on other properties.

I’m under contract for a 6 unit with room to expand into a 7th unit for $420,000. The build out will be roughly $100,000 but will likely only add $70,000 worth of value. If I added an additional 3 units would expect it to be around $750,000.

[Aaron Gordy]

super high cap rate. 6% is not even close. Check with the local lenders on financing it. I have done apartment deals with 10% cap rates in small towns in rural Texas areas. Maybe even a higher cap rate depending upon the prospects of the city. 

[Ian Stuart]

MULTIFAMILY EGI INCOME

Multifamily GPR: Rent Roll Rents w/ Laggards @ Market

Less - Concessions: 0.50%-1.00% (Depending on market)

Less - Vacancy: 5.00%-7.00% (Depending on market)

Less - Bad Debt / Delinquency: 0.50%-1.00% (Depending on market)

Multifamily NRI= Multifamily GPR - Concessions - Vacancy - Bad Debt

Other Income: Get a rent roll detail showing all the other lease charges by unit. IE - pet rent, parking fee, utility reimbursement fee, storage fees, etc. Trend up a bit if you think they're under charging. 

Multifamily EGI = Multifamily NRI + Other Income

COMMERCIAL EGI INCOME

Commercial GPR: Current leases / lease matrix. Maybe trend the rents if any lease escalations coming up. 

Vacancy: ~10.00% (Depends on market) 

Commercial EGI: GPR - Vacancy

TOTAL EGI INCOME

Multifamily EGI + Commercial EGI 

OPERATING EXPENSES

Real Estate Taxes: Do a post sale tax analysis to see how much your tax bill will rise post closing. Depending on the county, the assessor will pick up your sale price and adjust your taxable value to 70-100% of sale price.

Insurance: Have your insurance broker get you a soft quote based on your lender's insurance requirements. Probably $400-$800/unit assuming it's not a crazy building / market.  

Utilities: T12 +3%

Mgmt Fee: 6-10% (depending on market and onsite payroll)

Payroll: Maybe one free unit concession to an onsite who lives at building to assist with move ins etc (or not). Depends on mgmt fee and what you get included in that fee. 

R&M (Building R&M, turnover, grounds & landscaping): T12, break out any non-recurring capital expenses / renovations that current owner has baked in. Adjust for any old/new contracts you're removing or adding

G&A (Advertising, Office, Software, Etc: T12 adjusted for any old/new contracts you're removing or adding

Reserves: $250-$350/unit multifamily; $0.15/sqft commercial; $1.00/sqft commerical TI's

Total Expenses: Sum of all above expenses

NET OPERATING INCOME = Project EGI - Total Expenses

Proceed to look at multifamily / mixed use sale comps and make judgement call based on (i) going in / exit cap rate assumptions, (ii) $/unit, (iii) $/sqft, (iv) etc. If you're confident you can add another apt through the two empties, factor it into the exit income projections but dont forget to add the rehab cost to your cost basis projection so can calculate your return on cost basis. Due to to small location wouldn't necessarily bet on cap rate compression. 

Good luck!