Seeking Advice: Is $850K a Reasonable Offer for This Multifamily Property?

Question

I’m considering a 20-unit multifamily property listed at $1.6M, but the seller has indicated they’re willing to accept $1.25M. Here's a breakdown of the situation:

• Current Occupancy: 80% (16/20 units occupied).
• Current Gross Rent Roll: $14,265/month.
• Market Rent Potential: $17,665/month (100% occupancy).
• Renovation Needs: 15 units require full renovation ($10K/unit), 4 units are 75% renovated ($2.5K/unit), totaling $160K in renovation costs.
• Vacancy Loss: $41,820/year in lost income due to current vacancies.

Cap Rate Analysis

The seller lists the cap rate as 9.59%, but this is based on the projected NOI of $119,858 (assuming full occupancy and market rents). In its current state:

• Current NOI: $79,058 (based on 80% occupancy).
• Current Cap Rate (at $1.25M): 6.32%, reflecting the property’s as-is performance.
• Value at a 7.5% Cap Rate (Market): $1.05M, based on current NOI.

Given the renovations, vacancies, and risks tied to stabilizing the property, I’m considering offering $850K to reflect its current state and value-add potential. Does this approach seem reasonable, or am I undervaluing the property? I’d appreciate feedback from experienced investors!

Tayvion Payton · Answer

@Matthew Drouin The area around the property shows a median household income of $61,792 within a 1-mile radius. Using the 30% affordability rule, the monthly rent affordability for most households would be around $1,545. This puts the current market rents of $885–$925 per unit well within the affordable range, with room for modest increases post-renovation.

I’ve also reviewed competing properties in the area; apartments seem to be listed between 975 -1000, and houses are listed between 1300-1900. However, based on the zip code there are only 5 rentals available in the zip code. There are Class A industrial projects underway and the development of a large retailer. The population within a 3-mile radius is 8640, 5 miles is 9500, and 10 miles is14,500. Crime is low. The property is located near the downtown area.As far as the occupancy, I'm not sure yet of the reason for being at 80%.

Colby Fryar · Answer

@Tayvion Payton   -  my guess is that you are still too far off the price, at least in the interim but it is always good to put in an offer, because they may come back to you down the road.  Yup, property condition, vintage, neighborhood, tenant base, property management are all very important considerations.

Greg Kasmer · Answer

@Tayvion Payton - Curious... Did you underwrite if you would bring in investors (LPs) to help provide the down payment? If the deal is good enough their may be enough returns to pay investors as well as yourself. Essentially a syndication.... Did you look at that as an option?

Tayvion Payton · Answer

@Greg Kasmer i have not, im a new investor in the commercial and assumed due to my lack of experience it would be an issue

Tayvion Payton · Answer

@Karolina Powell no problem. i'm glad that you were able to get something out of it

Karolina Powell · Answer

I appreciate you posting this, gives the rest of us a chance to analyze a deal

Tayvion Payton · Answer

@Jaycee Greene I wouldn't have the funds for the down payment.

Jaycee Greene · Answer

@Tayvion Payton Out of curiosity, why are you passing on this? IMO, even at $1.25M, and assuming you can improve occupancy and raise the rents to the low end of the market range (after doing the rehab), I think there's a deal here.

Tayvion Payton · Answer

Seller isn't budgeting on the 1.25M asking price. Property appraised for 1.6M. It was great analyzing the property, but I think I will pass on it.

Tayvion Payton · Answer

@Alex Olson the AS in cap rate is 9.59%