Off market cap rate question

15 Replies

I’ve come across a off market 12 unit apartment, for sale by owner. Sale price 660K. Current rent is 575/unit= 6,900/ month. Local market supports 625/month. Expenses are approximately 1,700/month. My question when trying to accurately calculate cap rate, I assume all expenses are to be included like cap ex and property management? Their expenses don’t include those. Also, when calculating income, I assume you only use current rental income, not 100% occupancy if a unit is vacant and not what rents “could” be? I want to nail down a true number and not something inflated. A lot of numbers I see on this property and other buildings are what the potential could be versus what is reality right now. In my mind, it’s only worth what it currently generates today, minus deferred maintenance issues. Thanks for the help!

@Nicholas Jestus - this is pretty standard. Almost every multifamily deal I look at does a future or best case scenario Proforma. The listing broker tries to represent the property in the best light. Get last 2-3 years financials. Then underwrite a deal to your standards, not a best case scenarios presented by brokers or owners.

Are people paying for “best case scenarios “, wouldn’t seem smart in most cases. I don’t personally know anyone who owns any multi.

You have to know what the current numbers look like, but in this case it sounds like you are going to be moving towards that ‘potential’. 

If you don’t look at what those numbers are, you’re not giving yourself a true picture. 

We are obviously in a sellers market. So on average we are going to be paying more for the same Cashflow, or another way to look at it, we are paying for future Cashflow. 

Cap is a great number to look at, but it will never give you a good picture by itself. 

@Nicholas Jestus Capital expenditures are not included in the Net Income.

Your goal to nail down the true number is spot-on. Unless this is a situation where you are turning the property around significantly, I'd only use the owner's current numbers to structure your offer.

Some experienced buyers are paying higher prices because they know they'll be able to come in and execute their plan properly. There's less risk because they know what they're doing. If you're newer, I'd be careful and only work off of current numbers.

Yep, totally agree with @Chase Keller and @Andrew Kerr . I've been doing a lot of self-study about investing in MF for the last 2 years. One thing I've read often is that never trust the broker's brochures. The financials in those brochures do not represent the actual numbers. It just shows the best case scenarios. Do not trust any brochure or financials from the broker. What you need to ask from the broker is the seller's certified from the seller or direct from the seller, the last 12 months' financials at least. For estimating expenses, get expert advise from a mentor. Usually, expenses are estimated at 50% of the income but the financials might show a lower percentage.

@Ruel K. "trust but verify"

It's not like that with all brokers. I assume you're looking at bottom of the barrel listings that have been listed for a while and aren't selling. Those listings just stick out because they're priced terribly and are hoping to trick someone into buying. There are a lot more properties that don't last forever because they a fairly priced and realistically represented.

I always try to represent my offerings in the most honest and accurate way possible. Misleading numbers are a waste of time for everyone involved. Buyers can see through it, brokers have more trouble selling because of lost credibility, and sellers have to wait longer to sell because the property is marketed improperly.

I'll come at it from another perspective and say some buyers are too conservative to the point where it isn't realistic and they'll never acquire anything. Being conservative isn't bad thing (especially you're newer), but you want to be conservative and accurate at the same time. I've seen fancy excel analysis spreadsheets/models that churn out pure crap and make a legitimate, cashflowing investment look like a money pit that would push an owner into bankruptcy after a few months. I'm all for being conservative and feeling comfortable with making an investment, but there's got to be a balance.

@Nicholas Jestus at first blush those numbers-asking price and rent-look good; and I would look more. I can tell you flat out that 1700 is not the total expense. Normally I do not like dealing with FSBO because the owner is either hiding disclosures or is being unrealistic about price. Be that as it may just be extra thorough with the deal. I would ask for a rent roll, tax returns or financial statements and hand those to your accountant, and if you don't have one get one, if you want to be an investor. Call the city ask about the taxes, current and after the sale, ask about water and sewer, ask about the utility bill-verify everything. Tell the seller you are serious and need to do your homework, if you sense any reluctance simply walk away. If everything checks out get a proper inspection done by a licensed inspector. For a building like that expect to pay a thousand-a bargain by the way. Go with the inspector and enter each unit. If you can, meet some tenants. In order to get the cooperation from the owner you will very likely be asked to make an offer-do so subject to financials and inspection you can always adjust the numbers depending on what you discover. If the owner is for real he will admire your business like manner. If he balks move on.

You probably know all this stuff; but you asked, and I'm just responding.

@Paul Smythe I did not mean to come across like I am generalizing all brokers. :)

Thanks for the input, I appreciate it!!

@Nicholas Jestus

Cap ex is not an expense and should be included below NOI. Ask for the trailing 12months P&L, and you can derive NOI from there (Net income-operating expenses). I try to buy on ACTUAL numbers, not a pro forma that illustrates projected operations. I don't want to pay for my hard work.

Deferred maintenance is not always cap ex.  Look up the definition of cap ex.  It includes items such as driveways, roofs, a/c units, hot water heaters, flooring, etc.  Repairs are an operating expense and can encompass around 10-15% of income, depending on age and condition of property.


So I ran some numbers on the basic information provided, and just like most properties I’ve come across, it appears the only way to cashflow with just 20% down is to buy at a substantially reduced price. Spending $130+k down to finance a $650k purchase with taxes running $10k/year to cashflow $600/month doesn’t make any sense... to me. This seems to be the norm on most multi family deals in my area, and they usually sell to someone. Maybe I’ll stick to SFR, I want to make the jump, but to sell my $500/month cashflowing SFR for a $600/month apartment doesn’t make sense.

I see the same thing with MF in my area. They prices/rents are much higher compared to SFH. What I could see making MF worthwhile is value add, where you increase total rents by a significant percent (due to improvements you make), thereby greatly increasing the value of the property. Then, refi or sell after a few years.

A lot of deals on the market now don't make sense. But the same could be said for SFH too. So just keep plugging away to find one that does. You can find value add properties in MFH and you can find '70% ARV - repairs' type properties in SFH, so there is large profit in both. But in the end scale is the biggest difference for me of why you would do MFH over SFH.

@Nicholas Jestus It is very frustrating (we just talked about it on @Juan Vargas podcast yesterday) when you keep losing out on deals or come across deals where you have to twist n turn just to make the #s fit. 

You are doing the smart thing and maintaining your discipline. No deal is better than a bad deal (@Gino Barbaro ). 

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