Need help evaluating the numbers on a 12 unit apartment building

9 Replies

I'm looking at a 12 unit apartment complex in Central Illinois that is for sale. It's a nice place that has been well maintained, owned and managed by a husband/wife for over 20 years. Units are in good condition, but could use some updating which could in turn command higher rent rates. I believe the seller is asking a bit much for the property and at this point is not highly motivated, but is willing to negotiate. Where I'm really struggling is trying to determine the value of this property to know what is a fair price (I know every deal is a good deal at the right price :). I've divided NOI/Cap Rate but the numbers aren't looking right. I'm wondering if someone could take a few minutes to look over my numbers and see where I may be off a bit. Any takers?

@Roschelle McCoy please post your underwriting here.

The best would be to first run a "back of an envelop" calculation of current actual Rents collected which is the income - 50% = your NOI. then take off debt servicing to see if anything left. if there is something $$$$ left then take that number and divide it by the cash you put in the deal that would give you a GENERAL (VERY GENERAL) COC.

If that looks somewhat interesting you can dig deeper.

Note: it could be that the rents are bellow market, so the Income maybe way lower then what it should/ could be. that's a value add play right there. 

The same goes with the expenses, you need to know what are the expenses and verify them, find out the per unit expenses in your market.

Here's my evaluation of the current income vs. expenses:

Total Annual Income:      $83,820

Total Monthly Expenses:  $79,992

NOI: $3,828

Income is low due to below market rents.  Expenses are high due to some utilities being covered by owner and I also included mortgage expenses as if I was financing 100% of the deal.  

I assumed a Cap Rate of 5% based on other similar properties in the area. If Value = NOI / Cap Rate then this properties value is only $76,560. This can't be true, but not sure where I've gone wrong here.

@Roschelle McCoy

Start with the correct NOI. NOI is defined as: Revenues - Operating Expenses. NOI does not include debt service (loan repayment) nor should it include capital expenditures. Verify the revenues and operating expenses including provisions for property management, vacancy and property taxes based on the local market.

Cheers... Immanuel

Old school on the fly method. 5 times rent is the maximum you could pay. Current Rent x Number of units x 12 months times 5 years = Maximum purchase price. Of course you want to get it for less than that.

Originally posted by @George Skidis :

Old school on the fly method. 5 times rent is the maximum you could pay. Current Rent x Number of units x 12 months times 5 years = Maximum purchase price. Of course you want to get it for less than that.

 George, that is an interesting equation............equals about a 1.5 rule? Are you using that in todays market?

Originally posted by @Bjorn Ahlblad :
Originally posted by @George Skidis:

Old school on the fly method. 5 times rent is the maximum you could pay. Current Rent x Number of units x 12 months times 5 years = Maximum purchase price. Of course you want to get it for less than that.

 George, that is an interesting equation............equals about a 1.5 rule? Are you using that in todays market?

My focus is on decreasing maintenance, improving efficiencies and maximizing income on my existing investments. Then I will be looking for another mobile home park.

Thanks all for the replies.  This has been very helpful.  Here's how my numbers are looking now.  What a big change!  Now the property value number looks too good to be true....  

ANNUAL CASH FLOW
INCOME 83820
EXPENSES (w/ debt service)79992
CASH FLOW3828
ANNUAL NET OPERATING INCOME
INCOME 83820
EXPENSES (w/o debt service & Cap Ex)31392
NOI52428
PROPERTY VALUE
NOI52428
CAP RATE5%
VALUE1048560

These are all my "current state" numbers. My next step will be to rework my ARV numbers and see if I can increase cash flow to make this a viable investment.