Hello I'm starting to negotiate on an 8 unit apartment in Minnesota that is owner managed and maintained. (He does the Lawn Care and snow removal also.) Someone told him the cap rates in our area are 8.18% witch might be right but in finding the value now he hasn't accounted for vacancy, property management, etc. Should he be figuring that in to figure out the value like I do? Thanks
@Adam Kerr - if he knows how to calculate Cap Rate, he should know about all the important components. What matters most is that you decide what it's worth to you go from there. Show him your calculations. If he has different numbers, ask to see how he got his numbers. If he skipped anything, have him add it. Just because he chooses to do work and pay himself with the saved amount doesn't mean every other investor will do so. Time for you to be the teacher!
@Adam Kerr those costs would be deducted from gross revenue to determine the Net Operating Income (NOI), then you divide by the cap rate to determine the approxiamte value.
@Adam Kerr Put in industry averages for the expenses if he is doing them himself. Don't let him convince you that it is worth more than it is by picking and choosing to use cap rate, but not include all expenses.
Thanks guys, I can see what he did. He went back and used 2015 rental income I'm sure because he had 100% occupancy and low maintenance. I used his numbers that he gave me from 2018 rental income and subtracted only 5% vacancy (actual for 2018 was 3%), 10% for property management, 5% for maintenance, and 5% for plowing snow/ mowing. Nothing for cap x witch I think should be about 8%. I'm not sure if capx is figured in when figuring out what they're worth. They were build in 1960s, they are in good condition but bathrooms and kitchens are out dated. Obviously when figuring out the value we are a long ways apart when he figures it like that.
In answer to your question, no, he should not be figuring those into the formula, you should. I'm not sure I've ever seen a pro forma from the seller side that I was satisfied with as a potential buyer. Trust, but verify!
@Adam Kerr yes the owner should definitely be factoring in Vacancy, Loss to lease, bad debt and any concessions that he may have given to tenants. If he hasn't done this, then this is something that you factor into your underwriting, so that you can stay conservative with your assumptions