MF prop evaluation

9 Replies

I am looking at a potential 10-unit MF deal in Columbus, OH. Now, I have read about NOI, CAP rate etc and evaluating the purchase price based on cap-rate. But as I sat down with a spread sheet to plug the numbers in, I came up with these questions. Can experienced investors here throw some light on this?

PS: I don't yet have access to the previous years' operating data from the seller. It looks like I can only get access to that after I make an offer. But, I need that to come up with an offer price. Catch-22.

1. How do I determine the cap rate of that particular area? 

- I have tried to look in loopnet to look for similar properties but there aren't any like this. 

2. To my understanding, there have been no vacancies recently or in the last year(100% occupied) but Should I still factor 5% or so?

3. The property management company that I work with has come up with 12% + $3000 as their Fees to take care of the lawn, snow, collect rent etc. 

Not included in that are items like 

- Finding new leases when a unit becomes vacant

- Repairs and maintenance etc

4. Should I factor in Repairs and maintenance? If so , how much? Again, Since I don't have access to the operating data, I am thinking about 10% as the number. Is it too high or too low?

My agent has come up with 38k NOI. When I factor all the above factors, I am showing 29k NOI. What should I go with? Obviously the valuation is going to be very different based on which number I use.

Thanks in advance for all the help.

 Hey buddy.

I'm an agent in Philadelphia. 

Congrats on going out and playing with the numbers, I can see you've done your research. I'll do mybest to answer these questions.

1. The easiest was is to ask you agent. They should be able to pull up past sales and come up with an average in your area. .5-1.0 mile radius should be good enough. Spread out further if need be but I'd rather your agent find older comps. Let me know if this makes sense.

2. ALWAYS ALWAYS factor in vacancies. 10-12% minimum. It's better to be rewarded then have things go the other way around. I allocate 12% to vacancies for all of my investors.

3. Wow that's really high for property management. Over here in Philly, 10% of filled monthly rent is the fee plus 1 months rent finders fee. I would negotiate that down hard. 

4. Maintenance and repairs. Yeah this one I keep at %10. However I do slide it up base on age and demographic of my potential renters (example, D neighborhood + section 8 ... Increase maintenance to maybe %16)

Also why don't you have access to operating data? It's almost impossible ttoreally figure things out. How are they running a 10 unit with out a record of things? I would use these and negotiating factors to bring down the price. I hope this has helped. Cheers!

Thank you for the responses Ugochukwu.

1. I have asked him that question already. Waiting for the response.

3. Does lawn maintenance and snow removal come under proper mgmt or under another category?

They do have the operating data but I don't have access to it yet. In the absence of that, I am thinking of giving an offer based on 50% rule. What do you guys think?

NOI=GI/2

Value = NOI/cap rate

If it were me, I'd probably review the NOI figures with my agent to resolve that discrepancy.

I'm also in Philly and would agree with @Ugochukwu Opara   that that prop management contract sounds high! Especially as they're charging you all those fees on top of the 12% rate! Perhaps this is standard in your area, but I'd definitely shop around if you haven't already. I self-manage, so am not experienced with property managers, however I would try my best to negotiate out the fee for finding a new tenant. I'd rather pay a slightly higher %. I would want my PM's goal to be the same as mine: find and keep good tenants. The finder's fee would seem to create a bit of a reverse incentive (or at least mitigate the PM's negative repercussions of losing a tenant). If anything I might skip this entirely and use an agent when needing a new tenant. 

Just a thought, your agent could perhaps put a contingency in your offer that would allow you to get out of the contract after seeing the operating expenses. Contingencies do weaken offers, but their purpose is to provide a safety net for what you might discover in due diligence.

@Nancy Larcom  Bring up a really good option with the contingencies. I think that's a very fair way to mitigate things for you going in without see the actual guts, number wise, of the 10 unit. Have your agent butter up the other agent, works all the time. 

Originally posted by @Magesh R. :

Thank you for the responses Ugochukwu.

1. I have asked him that question already. Waiting for the response.

3. Does lawn maintenance and snow removal come under proper mgmt or under another category?

They do have the operating data but I don't have access to it yet. In the absence of that, I am thinking of giving an offer based on 50% rule. What do you guys think?

NOI=GI/2

Value = NOI/cap rate

There's another thread where people are arguing whether people use the 50% rule of thumb to make decisions. 

NOI=GI/2

Value = NOI/cap rate

You are calculating NOI using a rule of thumb Bad

You have bad NOI and not ONE cap rate comp (that would have actual expenses) so your VALUE will be crap. Now will the crappy offer be biased to you or the seller?



Originally posted by @Ugochukwu Opara :

 Hey buddy.

.....

3. Wow that's really high for property management. Over here in Philly, 10% of filled monthly rent is the fee plus 1 months rent finders fee. I would negotiate that down hard. 

.....

 To be clear, my prop mgmt company is charging me 12% of filled monthly rent and 1 month rent finders fee. So I see it is just 2% more unless you say that snow and lawn is part of the 10% in philly. That's what I am not clear about. I always thought it was a separate item and part of repair and maintenance category.

@Nancy Larcom Thanks. I like the contingency idea and that's why I was comfortable going with the rule of thumb offer so I can back out if something is not right after seeing their data

@Bob Bowling  You are right but I need a starting point to get more information regarding the property. With contingency I can back out if I don't see the value

Snow and lawn are usually separate and I would advise contracting them that way. You then specify what is done. They may be estimating 3 thousand for these and you could still contract them separately but you would need to see what they include in property management. 12% plus first month seems high.  In our area some do charge 12% but without the placement first month fee for student rentals.

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