What to base an offer on for a low occupancy/distressed MFH

4 Replies

I'm considering a 16 unit multifamily with an out of area owner. Supposedly, the owner purchased it to turn it around but didn't have the time and is now looking to sell. There are currently only 5 apartments rented and the NOI is a little over $7,000/year. Based only on the NOI and a realistic cap rate (say 10% for this area) yields a value that seems unrealistically low. On the other hand, I wouldn't be interested in offering a purchase price based on the units being renovated and fully rented. What would be an appropriate way to valuate a property like this?

I think the answer is basically something in between that will be agreeable to you and the seller. I doubt there is any hard and fast rule on this front. How much are you willing to pay upfront for work you will have to do yourself later? Perhaps you can start with how much the seller paid for it. If they overpaid then you might not have much room to negotiate. If they got it at a very good price then you might be able to pick it up for similar.

Determine the as-completed value and subtract the cost and profit you require to perform the work needed to get it to that point and you have that amount that you are willing to pay.

I posted this on a different question, but it pertains to your question: 

When I am buying a building like this I look at the whole picture. If the GPI is $70,500 and the expenses are actually 50% then you have $35,250 as the NOI (Assuming those numbers are correct). Then you need to figure out what the repair expenses are to bring the building to life and figure out how much money you will loose in holding/operating cost while the building is vacant. Once that is figured out, now you can make an offer based on your buying criteria.

For me I would look for getting this type of property around 1.5-2 points above market cap once it is stable. So if the market cap is 7, then I would expect to buy it around an 8.5-9 Cap using my pro-forma.

These numbers are just for an example:

$35,250 NOI

$450,000 List price

$100,000 renovation and holding costs

Market Cap=7%

Target Cap on Pro=forma = 8.5%

Purchase price=$414,705.88 minus $100,000 (reno) = $314,705.88

Using that I would come in with an offer at $275-300k

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here