Occupancy Rate and Offer Price - How Much?

Question

Considering all the other investment metrics turn out to be favorable, how exactly do you figure in the occupancy rate of a potential multifamily investment into what your offer price vs Seller's original asking price will be?

John Stevenson · Answer

I absolutely agree. It is impractical in many markets to think that you will have 100% occupancy.  Even if you have leases on all of the units, there will be annual turnover and that creates lost income as one tenant moves out and another moves in.

It is always better to err on the side of being conservative than base an investment on pie-in-the-sky numbers.  A good place to start is to find out the average occupancy rate within your market area. Another is to compare that building's rent to market rents to see where you stand. Then create your own pro-forma on those numbers.

Dale Osborn · Answer

Occupancy is a key factor in your negotiations. Lots of commercial agents provide a pro forma income & expense statement as if the property is fully occupied. This is pure speculation on their part so you need to make your offer based on the current occupancy & income level as of today. What takes place in the past or the future is not your concern until under your control. You have to get the accurate numbers and base your offer on current occupancy not on future possibilities. Some of the agents will even carry their pro forma sheets out for 5-10 years to show you their speculation on what the income stream will look like at those points. Don't get hooked into buying a property with the agent's made up numbers.

Philip W. · Answer

This is good input from both of you guys.  Thanks... i'll definitely consider what you're saying while moving forward

John Stevenson · Answer

@Joel Owens makes some good points.

Occupancy/vacancy rates are just one of the factors to "back" into a purchase price.  If you are basing a purchase price mainly on the income approach, then having access to a couple of years of P & L statements are absolutely critical.

The gross rental income will include your vacancy rate. ((Total Rent at 100% occupancy x 12 months) - (actual gross rent))/(Total Rent at 100% occupancy x 12 months) = vacancy rate.

But the big question is how much do I offer? Determine that by calculating the average net income over a 12 month period from the financial statements. Remember net will include all expenses including property taxes, insurance property management, repairs etc. Now, from that number you will take out your mortgage payment and your profit or ROI. If there isn't enough left over for both, then the property is not presently profitable. Don't buy it unless you know how to fix the problem quick.

Working a mortgage payment backwards based on what you expect the loan rate to be will give you your loan amount. Add in your down payment and you have your purchase price. Easy as that!

Joel Owens · Answer

I am not sure what you mean.

You could have high occupancy and hardly anyone is paying.

You could have a property 50% occupied with tremendous upside.

Many,many different things could be the case.

I think more of what you are asking is how the occupancy level and accuracy will affect what kind of loan you can get and how much you will put down and how much the debt  service will be.

A regular lender at 90% occupied maybe 6.5% fixed at 75% ltv.If you get into value add deals you will pay points and a much higher rate to fund and lower LTV.

You will then need to refi after stabilizing about 1 year out.So you build the carrying costs into the amount of time needed.

The books will determine the verified income and actual costs.From  there you run your desired cap going in and that tells you around the price you want to pay.

Now if the books are out of normal standard margins you have to ask yourself why that is (deferred maintenance,undisclosed credits to tenants,disguising fees paid to themselves in other line items,etc.)