Proforma vs Actual NOI to calculate Purchase Price

Multi-Family and Apartment Investing
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Proforma vs Actual NOI to calculate Purchase Price

Jason Kaye
Santa Cruz, CA · Member since 2017 · 11 posts · 4 votes

I am currently evaluating some small commercial multifamily properties (6 units). My understanding is that the pricing of a commercial property is based upon the Net Operating Income (NOI) and the Cap Rate.

I have found a couple of properties that I am interested in listed on Loopnet. They appear to be underperforming, mismanaged properties that I believe would be perfect to implement the BRRRR method on.

The LoopNet listing for one has the property for sale at $400,000 based on a proforma NOI of $29,000 and a cap rate of 7.36. The actual NOI listed for this property is ~3,000 for 2016. Based on this I would expect the property to be worth about $22,080 at the above cap rate of 7.36.

I am curious how to approach this scenario from a high-level perspective. Am I right in using actual numbers to price this property? If I were to make an offer should it be at this price? Should it be closer to the value based on proforma numbers? Somewhere in the middle?

**Disclaimer** 

I am not making an offer based on just these numbers. I will investigate more deeply why performance is currently so far below proforma. What type of work would be involved to get it closer to proforma, etc. 

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Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y

No, you don't make an offer solely based on the actual NOI. If you had a vacant property, that would not mean it had a value of $0 just because it wasn't bringing in any income. At the same time, you don't want to pay on the proforma because you'd be paying someone else now for something you would have to put in work to achieve further down the line.

Like anything else, it'll be somewhere in between. Whatever that ends up being will be whatever you're comfortable with and can negotiate. In a hotter market you might pay more for work you'll end up doing but that's just how it is.

I would say to verify all the numbers properly first to make sure your assumptions are on point.

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  • Michael Le
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    No, you don't make an offer solely based on the actual NOI. If you had a vacant property, that would not mean it had a value of $0 just because it wasn't bringing in any income. At the same time, you don't want to pay on the proforma because you'd be paying someone else now for something you would have to put in work to achieve further down the line.

    Like anything else, it'll be somewhere in between. Whatever that ends up being will be whatever you're comfortable with and can negotiate. In a hotter market you might pay more for work you'll end up doing but that's just how it is.

    I would say to verify all the numbers properly first to make sure your assumptions are on point.

    2Reply
  • Ryan Koehler
    Arlington, VA · Member since 2013 · 115 posts · 40 votes
    9y

    Jason - buying on actuals is the way to go but this is clearly a unique situation. I would recommend reaching out to the broker to get a background on what is currently happening at the property as well as 2-3+ years of operating statements. Perhaps units are being rehabbed and were taken off the market? Low occupancy is causing a property management change? Or, maybe a local corporation relocated and this property had a handful of renters who worked there? Something is definitely up for that substantial of a drop so definitely do your due diligence. 

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  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    Look at the income vs expenses. You should be between 50-60% (expenses are 50-60% of the Income). Also, look at the properties nearby to determine rent rates and occupancy. Like @Michael Le said buy on somewhere in between

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