Valuing Apartments with No Income

11 Replies

Hello BP world,

I’m preparing for a listing presentation on a 20 unit apartment complex down here in Houston, TX. I’ve heard extensive talk about many different situations in regards to managing, valuing and renovating apartments. The one thing that I’m finding extremely hard to find information on is How to Value an Apartment Complex when it’s making little to no income.

The 20 unit I’m referencing is 30% occupied with about $150k worth of rehab that needs to be put into it. There are not many if any apartment complexes that are similar in units that’s located near this property, so I don’t see me being able to use comparable method in order to get a valuation. Any insight or point in the right direction would be greatly appreciated. Ok, now for the numbers.

Currently Rented: $500 for 1 bedroom $600 for 2 bedrooms

Pro Forma Rent (After Rehab): $700 1 bedroom $750-800 2 bedrooms

Unit Mix: (12) 2 bedrooms and (8) 1 bedrooms

Rehab (Estimated): $150k

Occupancy: 30%

Taxes: $10k

Insurance: $7k

Notes: No rent roll & no P&L statement for YTD nor past years. Rent collected was mixed with personal funds, no business account established for property. 

its worth 30% of what it would be worth fully occupied.  your method does not change.  It is worth a multiple of the income it can generate.  Fixing the vacancy is your shot at a value add.  Is the value add worth your $150,000 investment?  is your $150,000 estimate realistic?

The seller does not get credit for potential rents he is not collecting due to his mismanagement or deferred maintenance.

Simple answer, hard to get the information.

Step 1.  Estimate the rent income as if the units were leased under the planned renovation.

Step 2.  Estimate the expense of the fully operational property.

STep 3. Calculate an "as if completed value" based on the NOI that you created above.

Step 4. Estimate the cost of renovation and subtract from the calculated value.

Step 5. What you have left over is the max value (ie flip value).  Discount this amount so that it reflects the time and risk of undertaking the investment. I would do at least 20% discount if not double that.

Big question, why the high vacancy?

Thanks gentleman for your replies, that greatly helps. The reason for the high vacancy is because the owners have decided that they only want to lease units to elderly people that's not depending on any sort of government program to pay their rent. i.e. Housing. 

They've had some bad experience with the younger crowd and have decided to avoid that avenue altogether. So needless to say, with the strict criteria in a D class area, with sub par property condition, it's hard to find tenants to lease up the property. 

I have bought and sold almost 1000 apartment units and never had a deal less than 80% occupied on day of acquisition. 

So I am not sure I can add much value to this thread, but my question Corey, have you bought a multi before?

The reason I ask is with this low of occupancy, please make sure you raise enough capital not only to renovate, but for extra working capital. Surprises come up on a well occupied asset and I am sure it will happen on this deal.

If you don't raise enough money for the surprise factor you might find yourself in some tough times.

I'd like to throw a question to add on.

How would you evaluate a commercial property that has no income? As in completely vacant and has lots of repairs/deferred maintenance?

@Brian Adams to answer your question, I have not purchased an apartment complex personally although I have assisted a few clients in their purchase of one. This complex however, I will be representing the seller in the sell of the apartment, not purchasing it myself.

@Kenneth Sok from what Chris and Nicholas explained, essentially you would do the same calculation. Only difference imo, is that you would charge a greater discount for step 5. Every investor is different so you would have to determine how much of a discount is satisfactory to you. One investor may be ok with 30% and another might be ok with 50%. Following those steps above should give you a solid foundation.

@Corey Smith - Thanks for your reply. Correct me if I'm wrong but I thought it was based on NOI. If there's no income, how do you evaluate what to base your valuation off of?

Is it at that point you use comps? If so, what if there aren't any comps? Thanks for your answers.

@Corey Smith

This place might fetch $100k given what you've told me.  And only if the person buying is sitting on a significant amount of cash.

150k in work means the entire thing is a disaster.  Class D neighborhood starts things off on the wrong foot.  If you were to give it away, here are the numbers as I see them today:

Taxes $833.33

Sewer and Water $1,000.00

Trash $500.00

Heat/Utilities $1,500.00

HOA $-

Cap Ex and Ops $500.00

Insurance $583.33

Mgmt Fee $1,520.00

Vacancy $10,640.00 (70%)

Total Expenses $17,076.67

Total Revenue $15,200.00 (at 100% capacity 700/800 for 1br/2br)

Cashflow/month $(1,876.67)

Cash on Cash Return-11.26%

So this place is going to cost the new owner $1875+ each month PLUS any mortgage you want them to acquire.  Now I know a fair amount of real estate is based on "potential" but this place is a disaster financially.  If the owner wants to sell it, start fixing it up and put some tenants in there.

@Aaron Montague I greatly appreciate the calculations and the comments, however $100k for a 20 unit complex is siding on extreme caution on pricing. No way any seller will let a 20 unit complex go for $100k. Even if someone did sell it for that number, the feeding frenzy of investors (residential and commercial) would drive the price up.

@Kenneth Sok you are right, it is based off of income. In a case where there is no income, you have to use Pro Forma numbers in order to calculate your valuation. So if you have a property in mind, find out what the rents are for 1,2,3 bedrooms and follow the steps Nicholas has outlined above. 

@Corey Smith

 Houston is very competitive for apartments right now, C class highly performing property is selling between $25-$35K a door.  So that is the upper range of value. 

A good operator who knows that they can bring in management efficiencies will salivate at a property such as this.  So while it is tempting to look at it as strictly a value based on the income, you are right to say that 100K is too low a price. (but if you did decide to list it at that, I would gladly take it off of your hands, today in fact!)

So on the low end you have a value of 500K running well, all rehabbed.  Minus the 150K for rehab and then put into your proforma what the price would be assuming a 10 cap on purchase by an investor while assuming current sub-market rents (your future rent values seem a little high for that type of property) and current sub-market occupancy. 

I think that would give you a more realistic starting negotiation price, and as the buyer went through due diligence the price may come down based upon what is found.

I know this is very general, if you want a deeper analysis, just contact me off line.

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