Hello Every one,
I am new to this forum and would like some advice on how to calculate the if the sale price of the multi unit is worth the money. Recently I found a good 11 unit building with significant rent increase potential. The seller is selling it for $3.5mm. My question is how do I evaluate if this sale price is the right?
Welcome to BP. I am also a newbie into MF arena.
You need to provide a lot more information.
What is the NOI? (rent - expenses ) ignoring mortgage costs.
expenses captured are accurate?
taxes are adjusted to new buyer and not prop13 rates for 20+y ownership.
suggested rents are competitive with rents in the market ?
what is the cap rate for equivalent MF ? price = NOI/cap
what is the potential to improve rents? at what cost of rehab or other?
You have to take proforma data from agent and adjust it to your expenses and rents to see if it makes sense for you.
hope this helps.
@Rita Roy Welcome to BP.
Is this going to be your first property?
What are current rents?
You mention an upside in rent but how much % are you talking about. Did you do the research on the current rents yourself or going by Pro forma?
Are you going to self manage or hire property management?
Make sure you account for vacancies.
Are there any major capex items like roof/windows that need to fixed? Make sure you get estimates on these and expect overages. We own a 4 pelx and we expected around 80K for fixing issues we found that what needed to be done but now as we are doing the work we realized we underestimated this by 50K.
@Abhay K. is right about property tax and finding out if there is rent control.
BP has a rental Property calculator under the Analyze tab. You can use it run your numbers. Just make sure you use real numbers not Proforma given by seller.
Go to IREM.org search for ARM certified property managers. Call 5 ask them what they see expenses running per category per unit. What do they see them selling for per unit, what is the market occupancy rate. What are the market rents? Ask them if they know anything coming up for sale. Great way to pick up some good info and possibly a deal.
You can also search NARPM.org for the RMP (Residential Management Professional) and MPM (Master Property Manager) certified.
The costs i have are all actual based on research I have done. I plan to spend a good chunk of my money on the remodel of the kitchens and bathrooms which will make the higher rents more realistic.
there is no rent control in the area as far as i know. This is going to be my 1st multi family property.
Is there a formula on how to calculate the right selling price for the property?
To answer your question, you need to find out what the market cap rates are in the area for similar multifamily properties. @Abhay K. basically answered your question with the questions he proposed you need to find answers to and with - price = NOI/cap rate
You need to find what market cap rates are, take the NOI from the property and divide by the cap and you'll know if the $3.5MM is too much or if it's right ballpark where it should be. I'm assuming this is in SF or close to in the Bay Area.
I would also recommend you do a proforma with the cost of improvements, what's being done, how that will affect rents (increase by how much over time), and what that will do to the equity in the property and how much it will raise value. That's probably more so for the financing end if you're not doing this all cash, but it's also good to do to see what you're upside actually is and also if the $3.5MM is warranted at this time.
Don't know if you need help or possibly financing, but please don't hesitate if you have questions. You've gotten some solid feedback from everyone.
@Rita Roy Well to tell if the 3.5 M is the correct price for property you need to know similar properties with similar NOI sold for recently. If you are new to the market working with a realtor who knows the area may be good. Also even if the property meets the market CAP it may not be good investment if it does not meet the criteria you have. Some people want to make X amount of return. So do you know what you are looking for?
Be conservative when estimating the rent increases you can get. It may take a couple of years to get to market rate so plan for it. The water cost is climbing in California so check if water is being paid by renters or you owners. If Owners than plan for the increase in your water bill. Also when you remodel keep water usage in mind.
By any chance is the property in Santa Clara. I recently saw a property listing in Santa Clara that is 11 units with the price you mentioned.
I highly recommend getting with a commercial broker in that specific area that KNOWS the specifics of that area - sales comparables, issues, etc.
I recommend taking a look at what type of debt service the property will support. Deduct your down payment and closing costs - which will give you the amount you need to finance. Then determine what interest rate your lender will offer. Then you can determine your payments. In California - 1.5% of the property value is a good rule of thumb for property tax. Bigger Pockets has a good rental property calculator. Figure some money for monthly maintenance and for pest control ($50) per unit. I also purchase a home warranty which is about $40 per unit - for minor repairs. Account for the vacancy rate as well.
I basically take the net operating income after expenses and divide by the interest rate to obtain value. I prefer a cushion with a positive cash flow - which impacts how much I am willing to pay for a property. Good luck on your purchase.