There are little or no rents being collected, so factoring in the costs makes for negative cash flow.
This is known as a distressed and/or poorly managed property. Do you know what the Seller is currently charging for rent (even though not collected). What condition is property in? Can you get comps for that neighborhood to develop Market Value for that type property?
Use the Sellers current rent rates to development a projected GSI. Then use a very conservative percentage for expenses (I use 55%) and find the projected NOI. If you know the Cap Rate for that area you can determine a value that way. NOI/Cap Rate = Value.
After you establish a Value (or ARV) for the property when it is rent ready you can work on an offer price. Determine your approximate Rehab costs and subtract it from the ARV to get your offer price.
Use all the negative things (Vacancies, poor condition, Rehab/Pending CapEx, lack of data) to justify your discounting the price.
Bottom line is make sure the numbers end up with a good solid Cash Flow.
Hope this helps. :)
How many units is this property?
Well said @John Leavelle That is exactly the advice I would have given. Unfortunately in situations like this you are required to come up with a pro-forma NOI in order to be able to formulate an offer. Feel free to PM me with any questions.
@John Leavelle I do not see what you are getting for all of the risk you are taking on. What is your upside? What about holding expenses? You will have utilities, insurance, and debt service if financed. A SFH fix and flipper is also going to figure what profit will make this risk worth it. Where is your profit?
We didn't discuss what the end game is. Do you plan on flipping it or holding? I certainly would not want to put all the time, money, and take on the risk into a property just to end up having a market value property that I invested near market price to purchase.
We still don't know the number of units.
Vacant units and rent below market is where smart investors take advantage of sellers of poorly managed properties. You never bay for future earnings.
Make a very low offer based on the present income only.
NEVER use pro-forma data; that's what should be when everything is PERFECT. It isn't, so don't!!
This mirrors @Thomas S. "Make a very low offer based on the present income only"
There's reasons why it is poorly performing; seen and unseen, so CAVEAT EMPTOR!
I do agree about not buying on proforma. The issue is commercial mf properties are valued based on noi. So how do you value it if you have a zero or negative noi. You need to value it on proforma and back the value down as I said above as a house flipper would. I would love to hear other ideas on valuing vacant commercial properties.
@Joel Owens maybe you can add to this.
The building might not even be worth saving. You have to look at highest and best use for the dirt. First ask WHY has the property failed? Too much competition in the area from new product, owner is a tired landlord who has mismanaged, has the area changed to more commercial or mainly single family houses in nature?
Next you look at density because maybe the structure on the land you can build more units new. Example if it was built 25 years ago maybe density was 15 units an acre and now today it is 25 etc.
What age the building was built also matters from a vacant and rehab standpoint. Certain vintage years can have major issues which drives up your overall cost per unit to turn around.
You need to look at class of the area. If C or D it can be very risky to take on such a project. Hard money lenders tend to not like those deals as risk is higher versus 50 or 60% occupied with some cash flow to the stabilize closer to full occupancy over time.
Totally agree with your comments. IF this was a flip. Holding costs and profit would have to be included. However, he mentions Multi-Family in the heading so I assume he wants to buy and Hold for a rental property. Therefore, I would be looking primarily for Cash Flow (Income). Of course the expenses are included when determining the Cash Flow.
Like @Thomas S.
excellent responses. This one should be pretty straight forward, it's a 4 plex. Needs about 30K in rehab work... you take market rents, it will take 1 month to finish the rehab and 3 months to rent (my guess) area is running 92% occupancy, but I'll use 45% vacancy (3 months vacant + area runs about 10%), variable expense will be adjusted for time used by any tenants 9 months that 1st year, fixed expense are fixed. I compile this data to find NOI, use a 12 cap since there's time risk to get rented, I'll then subtract rehab costs from the price since this shouldn't be part of the NOI income stream (one time rehab) and voila, there's my price. Hold 3 years so bank sees stablized property for easier financing options for another investor but use a lower cap about 9. Thank you all.
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