Hey all, gonna make my first offer today on a multi-family duplex 3/2 X 2 in the Waco, TX area near Baylor. Asking price is $249,900 and has 100% occupancy. Revenue is $23,400 yearly, expenses are $9,200 yearly, NOI is $14,200 and purchase cap is 15.8% at asking price. I was unable to get an accurate market cap, but seller says it appraised for $271,000. Seller is a realtor/broker. If seller takes my offer of $219,900, it will have $51,100 in free equity. Minus my WP. Is this a good deal for a end buyer?
Cap rates aren't the standard valuation methodology until you get to 5 units and above. However, applying your numbers 14,200 / 219,900 = 6.46% cap rate...not very appealing from that perspective.
This property would typically be valued using area comps, and as a wholesaler you s/b able to value it that way. I'd ask for the appraisal, and review it w/ a healthy skepticism.
@Chris Kates I think your numbers are off. CAP Rate = NOI/Purchase Price. If you do the math ($14,200/$249,900) the CAP rate at asking price would be 5.6. If he accepts your offer ($14,200/$219,900) your CAP would be 6.4. If you don't purchase in cash CAP rates are very subjective, you should use cash-on-cash to find out what the deal will make you. @Chris Soignier is correct for a 2 family you definitely want to get some comps for area.
In the end its a very general question to ask if they deal is good. The better question to ask is does the deal make sense for what you are trying to accomplish, and you are the only one who can answer that. I would define your criteria and get focused on what your looking for.
Thanks guys. That's why I asked. Advice well taken. So, should I be using the ARV formula for small multi-family property?
Thanks in advance, @Chris S. and @John Cohen
What are your plans for the property? I'd use the ARV max. offer formula if you want to wholesale or rehab/flip it. If you want to retain for cash flow, that doesn't really matter....I'd focus on CoC return while also ensuring I don't overpay vs. comps.
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