A Study in Numbers for Multi-Family

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This post is a study in numbers intended to help newer members to talk about and understand the numbers on a Multi-Family deal.

I have been working on understanding the numbers on a deal while putting together a template for a Sample Deal Plan. Although I think my template and numbers (excel sheet) are pretty good it still may need some adjustment. With that here are some numbers on a Mutli-Family listing that I would like to post to compare what I see vs what is listed. Think of this as me wanting to make an offer and wanting to know what the deal is worth to me vs asking price. Hope that all makes sense.

The numbers for the property are taken directly from the Offering Memorandum look like this:

Asking Price $ 2,900,000
Rental Income for 2017 $ 355,089
Additional Income $ 8,266
Gross Expenses $ 145,034
NOI $ 218,321
Cap Rate listed 7.53%

Now one of the confusing aspects of this document is based on Potential Rental Income. That PRI of $530,100 first year compared with the actual last year income is a difference of $175,011. To me that sounds like a big if and I could see some investors getting caught up on this number as fact instead of fiction. I’m not saying it couldn’t happen but I think the price you pay should be based on actual numbers and not potential. Would you agree?

Another note here is that they also run the gross expenses against this fictional number and add in Asphalt Repairs, Payroll and Management fee. Just something to be aware of because that adds according to their estimate about $32k in upcoming fees. 

Now for the cap rate. When I run the numbers not using any Vacancy Rate % I get 7.24%. If I add in a 10% Vacancy Rate I get 6.02%. 

With that out of the way and using the numbers above, I get this as a result.

NOI $218,321

Cap Rate 7.53

NOI * Cap Rate = $1,643,957

That is a difference of $1,256,043 or 57% of the asking price.

So is it typical to run into numbers that differ so greatly?

I’m sure there is a number somewhere in between that is a happy medium but when you start this far apart is it even worth it trying to make this a deal?

If I run the numbers using a 10% Vacancy Rate and then 50% expenses/ROI after that my number is even worse at $1,248,171. (Using this number makes the cap rate 13.28%)

This also gives a first year COC return of 33.52% (assuming a 5%, 20 Year with 25% down). This is vs a 6.46% COC return when I run the same calculation with the figures they listed in the statement.

Sorry this is so long but I am really trying to understand it or see how well I understand it. After running preliminary numbers I would most likely pass on this deal and move on to the next one. I do know however there are caveats that I did not cover such as location, population growth and Jobs but just looking at raw numbers it appears that what the seller wants and what the buyer would need to make this a good deal are pretty far apart.

I would love to hear anyone’s thoughts on this and hopefully, any discussion that follows becomes a learning experience for all.

James, from my experience numbers from a listing or Pro forma are typically wrong somewhere or other-it is just how it is. 

Pro Forma is Latin by the way, it means ‘I had to fill in something’.

You are wise to be running your own numbers and knowing what they represent, far too many ignore that and wonder why they are not doing better!

@Bjorn Ahlblad LOL that line made my day "Pro Forma is Latin by the way, it means ‘I had to fill in something’."

And yea I get that the numbers will be somewhat inflated because they are trying to sell and get the most they can for it. I guess I'm still not over the shock at how far off a lot of them are. The closest I got to my numbers matching up with the listings was a Trailer Park listed in Montana (I think) where I was within about 20K of asking. 

Thanks for the reply!