Evaluate this deal. Brrrr

7 Replies

Hi BP,

I have an opportunity to purchase a 16 unit building. Only 2 units are currently rented ($450/month). There is an absentee owner whom inherited the property and has let it fall into disrepair.

I am looking to brrrr this property, but this will be my 1st large multifamily (over 4+ unit). I'm trying to calculate the AVR/Cap Rate. The purchase price is $90k, with an estimated $60k in repairs. The market rents in the area are $500 - $600. If I purchase this property and complete repairs, have it fully rented how do I estimate what my refinance value is? Thanks in advance!

A lot of information is missing. You need to know your projected operating expenses and calculate your NOI. The value is the NOI (normal operating income) divided by the going CAP rate in the area (ask another investor or broker to find it). To calculate/estimate the NOI you'll need to know or have good estimates on the financials. You'll need to calculate all of your current/projected income and then subtract your current/projected operating expenses (not including debt service). The result is your Normal Operating Income, NOI.

So for easy numbers, a property bringing $10k per year NOI in a 10 CAP area is worth $10k/0.1 = $100k valuation.

So a property bringing in $20k per year NOI in a 5 CAP area is worth $10k/0.05 = $200k valuation.

@Carree Todd , hi and welcome.

I'm not calling B.S. on this deal...please know that up front, but $150K "all in" for purchase and repairs makes this sound too good to be true.  At that cost, and considering 16 units at $500 per month post-rehab, you are hitting the 5.3% Rule, more than DOUBLE the 2% rule that people say is "really hard to get" these days.

$8,000 / $150,000 = 5.3% rent to purchase price ratio.  Crazy high.

Down in the details: $60,000 / 16 units = $3,750 per unit repair budget.  That is barely enough to put lipstick on a pig (paint & carpet).  Doesn't sound like enough to me to bring up units that have "fallen into disrepair" up to standard.  How are the HVAC systems?  How is the roof?  Plumbing and light fixtures?  Electric up to code?  

By way of comparison, I plan on a minimum of $5,000 / unit whenever I'm doing a "lipstick" rehab on a 2 bed, 1 bath, 800 square foot house.  If anything more serious, it quickly goes north of $10K per unit.  Granted, you'll get some economies of scale for 16 units, but not 66% off.

How sure are you of these numbers?  What is your track record of rehabbing units in this condition?  Who gave you the quotes?  What is the scope of work?  Is your Seller utterly clueless about the value of this property?  Is there environmental contamination?  Is the property in the middle of nowhere and no amount of rehab will remarkably improve the vacancy?  Lots of questions because the value sounds too good to be true.

If all the numbers check out, you've found a diamond and should have it locked up under contract yesterday.

@Erik Whiting Thanks for chiming in. I wouldn't say this deal is B.S. =)  I did go ahead and get it locked up under contract, I can exit the contract if my inspection turns up anything major. The $3,750 per unit or $60k rehab is from one of the contractors I had walk through and give me an estimate, I have now asked for an itemized bid. 

How sure are you of these numbers? Purchase price, Yes! Rehab cost, no. have asked for an itemized bid.

What is your track record of rehabbing units in this condition? None, 1st time.

Who gave you the quotes? Contractor 

What is the scope of work? Not provided yet

Is your Seller utterly clueless about the value of this property? From talking with their agent gathered that they inherited the property and see that they can get an easy $90k in their pocket.

Is there environmental contamination? Nope

Is the property in the middle of nowhere and no amount of rehab will remarkably improve the vacancy? No in a major metropolitan area 

so the home likely has lead paint and asbestos. need to consider the additional costs for any renovation work as you would need to use licensed ACM and LBP contractors for work that disturbs those materials.

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