What your offer be using these numbers

10 Replies

What would your offer be, rough estimate?

What would your P%I be ?

21 units total gross yearlyincome 201,600

5% Vacancy

Expenses

PM 10% of gross ?

Taxes 32k year

Insurance 16k year

maintenance 10 % of gross ?

Common area utilities 1,500 yr

Reserve put away 12 yr

Thank you for your thoughts

Mike

It's tough to say without knowing the cap rate in the area.  I'd also look at total expenses as a percentage of gross income.  

Originally posted by @Matt Hernandez :

It's tough to say without knowing the cap rate in the area.  I'd also look at total expenses as a percentage of gross income.  

 Matt

Say 10 cap rate. Come up your own scenario what would work for you

Actually the CAP rate of the area is secondary - I care very little about what others are paying for a cash flow. Now, when I sell, then the market CAP is of interest.

I would need to know more about the local economy, the building's clientele, the business' performance (is it operating efficiently, if there is room for improvement, how much), the age of he building and its degree of obsolescence and deferred maintenance.   These all contribute to the risk.

Items for additional clarification:

That aside, I do not see water and sewer in your list of expenses, is the building sub-metered?

You list 5% vacancy.  Is that physical vacancy or economic vacancy?  My guess would be physical.  In that light, what is the turnover rate, current loss to lease, incentives given for lease-up, offsets, bad debt, etc)?   What are the vacancy and turnover rates in the area?

Is there an on-site manager?  How is s/he compensate?  Is that included in the 10% PM?

What are the advertising & marketing expenses?

... lots of little details to analyse.

   

Depending on the information above, the business may be worth 1.5+ million or it may be worth walking away.

This is not the sort of property I'd be able to invest in (in the foreseeable future) but I like numbers so here goes :)

From the numbers you gave, I have total yearly expenses at around 42k, so NOI is 160k/yr. For a project this scale (and assuming flat or low appreciation), I'd guess a 10% cap rate which would mean a purchase price of $1.6M. If you have multiple mouths to feed (i.e. syndication) I'd look for a 12% cap rate, i.e. a purchase price of $1.3M. If it's in a hot neighborhood in NY or CA with Chinese investment pouring in as they flee their home economy, a 6% cap rate ($2.7M!) would be just fine. Huge difference!

But without knowing a bit more about the market, the building, potential for appreciation/depreciation and long-term needs, it's tough to say. Do you know why it's on the market?

@Mike Campbell

oh WTH...just for fun. As you know each person has their own method for validating an offer/purchase price. Look at them all but find one that works for you is the best advice I can give you on this subject.

*USING THE INFO GIVEN* use this for example only as there are various methods to come up with a offer/purchase price.

21 units total gross yearly income 201,600, 5% Vacancy, Expenses PM 10% of gross, Taxes 32k year, Insurance 16k year, maintenance 10 % of gross, Common area utilities 1,500 yr:

(INCOME - EXPENSES = NOI) 201,600 - 99,900 = 101,700

NOI * CAP RATE 10% = 1,017,000 (strike point)

(strike point - 10% = offer) 1,017,000 - 101,700 = 915,300

http://www.biggerpockets.com/renewsblog/2014/10/20/your-complete-guide-to-analyzing-a-property-in-just-10-minutes/

I'd say by looking at these numbers it would be somewhere around $1M, give or take $200,000 in either direction based on location, condition, and other factors.

Originally posted by @Russell Tidaback :

@Mike Campbell

oh WTH...just for fun. As you know each person has their own method for validating an offer/purchase price. Look at them all but find one that works for you is the best advice I can give you on this subject.

*USING THE INFO GIVEN* use this for example only as there are various methods to come up with a offer/purchase price.

21 units total gross yearly income 201,600, 5% Vacancy, Expenses PM 10% of gross, Taxes 32k year, Insurance 16k year, maintenance 10 % of gross, Common area utilities 1,500 yr:

(INCOME - EXPENSES = NOI) 201,600 - 99,900 = 101,700

NOI * CAP RATE 10% = 1,017,000 (strike point)

(strike point - 10% = offer) 1,017,000 - 101,700 = 915,300

 Russell

Thanks, this is what I'm looking for, different assumptions / offers, if there are several feed backs all with in a certain range and or average offer price then I would know I'm close or way off.

Mike

Originally posted by @Mike Campbell :

 Russell

Thanks, this is what I'm looking for, different assumptions / offers, if there are several feed backs all with in a certain range and or average offer price then I would know I'm close or way off.

Mike

Mike:

Just be careful of the assumptions.  As I mentioned above, there is limited data available here in which to frame the numbers you did provide (the water/sewer alone could be another $5K/yr) and we know nothing of the economic vacancy, tenant population, asset condition/obsolescence, level of performance or room for improvement.

You should be underwriting a property like this to (M)IRR (with a time horizon to your exit) and weight the cash component of the return based upon the nature of the property and its location. Trying to deriving a price from a self-selected CAP rate is a bit like throwing a dart with your eyes covered. {CAP is merely an indicator of what others (the market) has payed for a similar cash flow}

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