What is the first and foremost thing I’d want to study when analyzing whether I have a good deal or not on a commercial apartment building of 5+ units?
NOI and market cap rate are the two most important things in determining the value of a building.
The key is verifying all of the numbers (income/expenses) to make sure that the NOI is properly accounted for.
In my market it's common for brokers/sellers to leave expenses like property management amongst others out.
It's also common for them to present a deal based on pro-forma numbers instead of the actuals.
This makes the NOI appear higher which ultimately makes the building look like it's worth more on paper.
@Chealsea Hayes I look at asking price compared to income-and not just information I am given by the seller or broker; too much and too little income are equally bad. .9%-1.3% is kinda' my sweet spot. Then I go on to other measures.
@Chealsea Hayes - Does it meet your investment goals?
The process requires qualifying the income, expenses, lending, market analysis, repairs budget, etc. Everyone goes through the same analysis until it spits out a returns projection. If those returns fits your parameters, you've got a good deal.
Income and expenses are two key components, a good property manager can help you verify them based on their experience.
@Brian Garrett nailed it. Want to emphasize being careful on the pro-forma vs actuals. Grab actuals and run your model. Then compare it to their pro-forma, see what was missed, undervalued, expense opportunities etc. Then create your own pro-forma and this serves your case if it is a good deal or not.
Study your market down to a tee. Contact a property management company to help you do such.
@Chealsea Hayes You have received a ton of great feedback. I would say you need to develop a process (which will take time and experience). You should first decide what area(s) you're concentrating your search on and why. Then after you get a handle on how to underwrite a commercial property, you set the limits as to what are you expecting to see when underwriting a potential investment.
Obviously in order to do a thorough evaluation, a seller must provide you with T12 (prior year financials) and the rent roll. When it comes to rent roll, a lot of times you will get just a list of how much each tenant is supposed to pay. However you need to insist on getting the statement that details how the tenants have been performing on their duty to pay over the last twelve months. You'd also need to obtain the comps for the area (your broker should be able to help you with that).
This will give a good head-start to your process.
@Brian Garrett great info, thanks! What is NOI? And how would you go about obtaining accurate numbers on income and expenses?