Making an offer on a MF property that needs repairs

Multi-Family and Apartment Investing
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Making an offer on a MF property that needs repairs

Patrick Elias
Member since 2025 · 8 posts · 7 votes

Hey BP! I am planning on putting an offer on a 16-unit MF complex in Austin. This property needs some CAPEX spend like a new roof, foundation and AC units. I might be getting too caught up in the weeds of the #"s, but when analyzing my offer for residential I simply subtract those repairs needed from the ARV. I don't feel like it is that simple for MF, if the CAPEX spend will be 300k, does my offer need to be 300k less?

There is room to increase the rents by putting these repairs in, so theoretically, I am raising the value of the property if I put in that CAPEX investment. The amount of $$ I am spending to raise rents is not justifying the new value of the property with the new NOI. Hence, why I would like to make an offer at a higher cap rate than the market.

If I purchase the property at a 8% cap, can I expect to sell it at the market cap (5.5%)?

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Michael Garofalo
Rental Property Investor · Washington, DC · Member since 2018 · 198 posts · 169 votes
1y

@Patrick Elias I don't think it's fair to say if the property needs 300k then you should just automatically lower your offer by that amount. It's not black and white with MF and even though you think it will only be $300k, I can almost guarantee that number will be higher once you get into the thick of the projects should you close on this property. Over the past 8 years, I have purchased smaller multifamily (duplex) all the way up to an 11-unit complex and every single one of them had surprises even after I did all of my detailed due diligence. That has never bothered me because I am planning to hold everything for a very long time, but if you have a shorter-term exit strategy, I think you need to get a bit more granular as @Jaycee Greene has suggested and also look at overall cash flow and NOI with respect to raised rents and the level of vacancy you may experience.

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  • Jaycee GreenePro Member
    Real Estate Consultant · St. Louis MSA · Member since 2024 · 3k+ posts · 727 votes
    1y
    Quote from @Patrick Elias:

    Hey BP! I am planning on putting an offer on a 16-unit MF complex in Austin. This property needs some CAPEX spend like a new roof, foundation and AC units. I might be getting too caught up in the weeds of the #"s, but when analyzing my offer for residential I simply subtract those repairs needed from the ARV. I don't feel like it is that simple for MF, if the CAPEX spend will be 300k, does my offer need to be 300k less?

    There is room to increase the rents by putting these repairs in, so theoretically, I am raising the value of the property if I put in that CAPEX investment. The amount of $$ I am spending to raise rents is not justifying the new value of the property with the new NOI. Hence, why I would like to make an offer at a higher cap rate than the market.

    If I purchase the property at a 8% cap, can I expect to sell it at the market cap (5.5%)?

    Hey @Patrick Elias, welcome to the BP Forum! It would help the forum (and myself) if you could provide some specific numbers for this analysis. 

    In these situations with my real estate clients, we usually "back in" to the offer price because the expected ongoing cash flow/NOI is the most important number and will dictate the loan amount (and resulting equity needed).

    Is the rehab going to cost $300k? How long will it take to complete and will any of the units be rented during the rehab? What do you expect the ARV to be, along with the post-rehab rents.

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  • Michael Garofalo
    Rental Property Investor · Washington, DC · Member since 2018 · 198 posts · 169 votes
    1y

    @Patrick Elias I don't think it's fair to say if the property needs 300k then you should just automatically lower your offer by that amount. It's not black and white with MF and even though you think it will only be $300k, I can almost guarantee that number will be higher once you get into the thick of the projects should you close on this property. Over the past 8 years, I have purchased smaller multifamily (duplex) all the way up to an 11-unit complex and every single one of them had surprises even after I did all of my detailed due diligence. That has never bothered me because I am planning to hold everything for a very long time, but if you have a shorter-term exit strategy, I think you need to get a bit more granular as @Jaycee Greene has suggested and also look at overall cash flow and NOI with respect to raised rents and the level of vacancy you may experience.

    2Reply
  • Greg Kasmer
    Rental Property Investor · Philadelphia, PA · Member since 2021 · 774 posts · 501 votes
    1y

    @Patrick Elias - With multifamily properties with this many variables at play including renovations, increasing revenues in the future, changing expenses, and timing coming into play, you would benefit from modeling this out over a 3 or 5 year time period. There are several cash flow spreadsheets that people use to analyze multifamily properties including modeling out renovations and timing of those to incorporate holding costs. I would look up Best Ever Cash Flow Calculator by Joe Fairless and Syndicate Deal Analyze by Michael Blank as a starting point. I also have a few others I use as well if you are interested. Just DM me. Good Luck!

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  • Ryan RomingerBusiness Member
    Real Estate Broker · Indianapolis, IN · Member since 2018 · 340 posts · 144 votes
    1y

    CAPEX on multifamily isn't a straight ARV-minus-repairs equation like in residential. Instead, you should analyze how the $300K in improvements impacts NOI and future valuation.

    If your CAPEX spend doesn't produce enough rent increases to justify the new value at a market cap rate, you'll want to negotiate a lower purchase price or find a way to optimize expenses.

    As for cap rate compression, buying at an 8% cap and selling at a 5.5% cap is the ideal value-add play, but it depends on market conditions, rent growth, and investor demand at exit. If you can prove stabilized income growth and lower risk, selling at a market cap rate is realistic.

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    • Patrick Elias
      OP
      Member since 2025 · 8 posts · 7 votes
      1y
      Quote from @Ryan Rominger:

      CAPEX on multifamily isn't a straight ARV-minus-repairs equation like in residential. Instead, you should analyze how the $300K in improvements impacts NOI and future valuation.

      If your CAPEX spend doesn't produce enough rent increases to justify the new value at a market cap rate, you'll want to negotiate a lower purchase price or find a way to optimize expenses.

      As for cap rate compression, buying at an 8% cap and selling at a 5.5% cap is the ideal value-add play, but it depends on market conditions, rent growth, and investor demand at exit. If you can prove stabilized income growth and lower risk, selling at a market cap rate is realistic.


      This is really good advice, thanks a million Ryan. In this specific deal, the 300k in improvements did not justify the new proposed value of the property. Hence negotiating a lower purchase price is the only way I can recoup my improvements investment and some, while increasing NOI.

      The goal for us is to stabilize this property and eventually sell at the market cap in 3-5 years.

      Thanks for the help!

      2Reply
  • Kyle Vogeler
    Rental Property Investor · Emmaus, PA · Member since 2021 · 152 posts · 85 votes
    1y

    It doesn't necessarily correlate to a $300K deduction in price. The needed cap ex would directly impact Cap Rate and NOI, and those numbers would determine the price you pay.

    If there is a ton of deferred maintenance, then you can and should get the property at a higher cap rate. You can then do a market analysis to see what cap rate repaired properties are selling at and determine the value you've added (all else being constant).

    I'm assuming with $300K of work that rents are also lower now than they will be upon completion, so that change in NOI should be reflected between purchase and sale as well. Just make sure you don't purchase at the Pro-Forma rates.... if you are doing all the repair work and filling all the units, the seller shouldn't get the benefit of selling at a pro forma price.

    1Reply
  • Robert Rixer
    Investor · Miami, FL · Member since 2015 · 355 posts · 268 votes
    1y

    A lot of good answers already. I'll add that if the CapEx improves what you can get in rent, then this needs to be factored in. Unfortunately foundation, roof and new AC won't improve rents as they are expected basic needs. Interior CapEx like a new kitchen, flooring, etc. will garner higher rent.

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  • Kate Sanchez
    Member since 2025 · 244 posts · 99 votes
    1y

    @Patrick Elias Sounds like a great opportunity! Factoring in CAPEX while keeping future value in mind is key. Have you run scenarios on different cap rate exit strategies?

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