Cap Rate or MAO (ARV - Repairs) on 25% Cap Pro-Forma SFR/Multi

5 Replies


There is an opportunity to purchase 25 units for just under $1M. It is a mix of 14 multifamily units consisting of 2x duplexes and 2x 5-units, plus an additional 11 SFRs in various towns on the east coast, all assets within 25 miles of each other +/-. A few units need light rehab and are vacant.  As-is cap is at 15%. Once rehabbed, the 5 vacant units will bring this up to pro-forma 25% cap rate based on the above purchase price. No liens on any of the assets, owned free & clear.  

Question being...for an offer to the highly motivated seller and to attribute a value to the 12 SFR's in the portfolio, is the MAO approach used for the 12 SFRs...and cap rate for the multi units?  To bring in 25% annually overall regarding the income of all units would be attractive for sure, stable rents, long-term leases in place.

Even at market cap, the portfolio could be worth $2M+ based on NOI, etc....but...the SFRs in the mix create complexity in coming up with a purchase offer. We have one in mind, seller has already agreed, can easily go to contract now on it. Split the SFR's into a MAO scenario and the multi units into a 2nd scenario...2 offer contracts?

Any/all thoughts are welcome, feel free to reach out or comment here.  If we take it down, we're open to an equity-share for investors that assist in the acquisition.



Why would you need two contracts? If you have a lender that will loan on the portfolio, then value them however you wish and give one price for the package. If the seller already agreed to the price you "had in mind" it sounds like you are the one creating complexity. That is, unless you are concerned for lenders, appraisals, insurance..

You are all over the place, but if you can purchase a portfolio for 1mm that you value as 2mm, sounds like a no brainer??

@Phil Ostrowski , do a two-pronged test to determine your offer price on the SFR and a separate test on the multifamily units.

Break out the SFR and run comps on each of them. Calculate an ARV on each, based on comps, and a repair budget on each, based on your inspection. Then calculate your maximum offer price by multiplying the ARV times your required discount and then subtracting rehab.

Next prong: Calculate the rents for each SFR and subtract expenses and vacancy, etc to arrive at the cash flow from each house. Then calculate the CoC return from each house using the amount of cash that would remain tied up in the property after financing is applied (and don't forget to subtract the debt service from the cash flow when calculating the CoC). Now determine the CoC you wish to achieve, and if the calculated CoC is lower than the desired CoC on any given house, reduce the purchase price on that house until you are able to hit your desired CoC return.

Now that you've done the two-prong test, take the purchase price resulting from each of the two tests above for each house and select the lower of the two.  That's how much you can pay for each house.  Add them all up.

For the multifamily, you'd use a similar test using IRR or CoC (whichever is more important to you, or use both) to arrive at the max price that hits your targeted return, then subtract needed repairs. This will give you your max price for the multifamily units.

Now just add the multifamily and SFR prices together and you can write it on one offer.

Brian's reply is great for the nuts and bolts if you are trying to evaluate the SFH to liquidate them separately but Chris seems to shoot an arrow straight to the point. Are you planning to break this up into multiple loans? Are you looking for financing and worried about the properties qualifying? Can you explain more about your concerns because it seems that you have answered your own question about valuation based on accepted offer and value.


We do our best to target the exit strategy before we acquire anything...a wholesale deal, fix & flip, buy/hold, etc. In this case, we looked at various exit strategies of perhaps later selling off each unit 1 by 1, or...from a sheer cap rate perspective on what the portfolio brings in monthly we could sell the portfolio as a whole later on down the road. However, various buyers could come along and have different perspectives on a value-approach to the portfolio via MAO (ARV minus rehab) or base the value on just the annual 20% return on investment...CoC approach, etc.

We don't want to assume every buyer that looks at this portfolio a year from now will take approach a/b/c, arrive at a value of what it's worth.  If we assume incorrectly based on incorrect value attributed from the start, we're essentially eliminating those potential buyers in the future, hence cutting out exit strategies due to a buyer's thoughts of "the portfolio isn't worth the asking price."

Definitely NOT wanting to complicate things, yet at the same time we can exit in a variety of ways as long as our initial valuation of the portfolio was correctly executed from day 1.

Howdy @Phil Ostrowski

Sorry, I realize I am jumping in here a little late.

With this type of mixed bag portfolio, with properties in multiple locations (markets), I would not get to concerned with using Cap Rate to evaluate the overall deal.  Not sure how you think you can apply "Market rate" to this deal.  Which Market?  I would stick with basic math.  $1M purchase, Estimated Rehab needed, P&L statements, Rent Rolls, Market rent rates for each area, etc ...  Other than Market Cap Rate what are you basing the doubling in value on?  Upgrading properties?  Increasing rents?  If you believe it is that great of a Value-add deal, then, it should be a no-brainer.

Totally agree with @Brian Burke on method to evaluate each type property.  If all your ARVs come back close to your $2M number you have a winner.  Do not forget your debt service in all your analysis.

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