Estimating ARV on 5 plex

4 Replies

I am looking at a 5 plex in a small town in northern wi. The deal is:

5 - 2 bed 1 bath units renting at $500/ unit at full occupancy currently with month to month leases. Asking price is $100,000. Some tenants have lived there for near 30 years. Based on pictures I can't see any major renovations needed but I'm confident it needs something at this price. My lender will do 80% of purchase and 100% rehab then refinance at 70% ARV with a 20 year note at 6%.

I’m considering trying to do 1 year of owner financing and covering the rehab then doing refi. I would like to hold it 2 years, up the rent to current rates of $600-$650 then sell it. 

I am not experienced in determining ARV on a commercial property like this. And given there aren't many comps how would I evaluate this property?

Thanks for the help!

@Account Closed , ARV here is irrelevant. Any time you have more than 5 units, you must use the income value approach not the comparable sales approach. Income - expenses =NOI The NOI is where all the value is. Can you increase the revenue? Can you decrease the expenses? Are there any other ways for you to strategically force the appreciation other than just raising the rents? Just some things to think about

Thank you for the response TJ. That leads me to another question.

If the NOI is the primary factor, how do I determine an estimated loan value for refinancing post rehab? Or how does the projected NOI relate to the projected Value for refinancing to pull equity out?

I'm awaiting the expense breakdown for the property yet to determine current NOI.

Thanks again

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Looks like you need to do some research on NOI and how it dictates property values. Watch some videos on youtube and it should give you a decent foundation to build on.

Here's a quick use case with some easy numbers:

10 unit property - Purchase price $1,000,000

Annual income = 10 units x $1000/unit/month x 12 months = $120,000

Using 50% rule - Expenses = $120,000 x 50% = $60,000

NOI = $120,000 - $60,000 = $60,000

Property was purchased at a 6% cap rate ($60,000 NOI / $1,000,000 PP)


Value Add:
Increase Rents by $50/unit/month:

Annual income = 10 units x $1050/unit/month x 12 months = $126,000

Decrease expenses by 10%  - Expenses = $60,000 - 10% ($6,000) = $54,000.

NOI: $126,000 - $54,000 = $72,000

Assuming market cap remains at 6%

New Value: NOI ($72,000) / Cap Rate (.06) = $1,200,000

That's excellent. The example helps a ton. I will do more research before I move forward on the property on the NOI and how it affects value.