Questions regarding small apt building analysis

[Avi Garg]

Looking at a small apt building of 24 units as a buy and hold listed at $695,000. It was renovated last year so not much room for value-add. Rents are on the higher side as well. Roof and HVAC reserves have been accommodated in the proforma analysis based on the remaining life. Proforma CAP is 14% and Current CAP is 12%

Few questions:

1. Currently 4 units are vacant. Do I used the potential income for these units in my analysis? I think I should but wanted to get feedback.

2. Expenses are on the lower side (including the reserves for the roof and hvac) at 34%. With potential gross revenue of $147424, the NOI is $97300, it looks like a good deal. If you would have to send in an offer, what would it be? Would you base it on 50% expenses?

3. With 50% expenses and 14% CAP, the offer price would be ~$526,500 and 12% CAP the offer would be $614,300. Which is a better offer? I am trying to send a reasonable offer than an unintelligent one.

Any help is appreciated.

PS: Some numbers are random to keep anonymity of this property

[Account Closed]

There are not multiple cap rates.  There is only market cap rates.  That is calculated on closed sales of similar properties.  Your PGI would be at market rents and your expenses should be market.

If the property is not operating at market then you would calculate value as I outlined below in another thread, Also reserves are not an operating expense and is not a part of NOI.

Nope. it will ONLY change the value NOT the cap rate. Two exact same buildings have the POTENTIAL to gross $100,000 rents. Bob is a smart investor and operates to market and has a NOI of $60,000. Similar properties have sold at a 8% cap rate so if Bob sells he can expect to get about $750,000. Frank is lazy and stupid and his building is half empty and he is paying his brother in law too much for janitorial, repairs and maintenance and his NOI is only $20,000. At an 8% cap rate a novice seller would think his property is only valued at $250,000! Numbers don't lie. But Bob knows it will cost him about $100,000 to get the property up and running just like his identical property. Fire the BiL pay some leasing fees and a little maintenance. Now counting on the lost rents until he gets the property up and running he will only be out about $150,000. So Bob has a property capable of generating $60,000 NOI. At market cap rate of 8% the property is worth $750,000. But it will cost about $150,000 of elbow grease to get there. So Bob would buy the property at a 8% cap MINUS the costs to get there $150,000. So he pays $600,000. See? the cap rate is the same, the value changed.