Found an off-market deal in a market I'm beginning to dig into. My realtor and I checked out the building yesterday and we were extremely impressed with 1) lack of tenant turnover and 2) the quality of the building itself. The only ? I have with this is that 6 of the 8 units are referred to as efficiency units, which are effectively studios with shared bathrooms. Now the cash flow here speaks for itself, and the fact that tenant turnover has been pretty low despite efficiencies attracting transient tenants is a big positive.
That being said, and as the landlord is motivated, I'm trying to figure out what the best way to get the true "value" of the building. Is comps the best way to look at this still or is there another method that I should be taking into account here?
One way is to reverse engineer the value based on market CAP rate for the area. You should be able to get the NOI from the manager/owner (Income less Vacancy less CapEx Reserves less Operating Expenses = NOI), then research what is the market CAP rate in your area for a 6-8 unit property. Any decent commercial broker should be able to tell you that. Once you know that, you simply divide NOI by CAP Rate. That should give you a ball park figure.
An example: let's say NOI is $50,000 per year (remember, this is BEFORE debt service) and CAP rate 7. $50,000 / 0.07 = Approximately $714,000 value. Adjust as needed for age, amenities, location, and condition compared to comps. Ideally, get comps as close to age, condition, and location.
Keep in mind: value includes the total cost of the project (i.e. the total Capital invested). So you want to be "all in" (purchase price + closing costs + rehab + holding costs) at $714,000 in the scenario above.
Thanks for the reply! One question I have with regards to NOI (for value purposes) is should I be incorporating a) projected maintenance costs or b) projected property management fees into this?
My guess is no, but want to make sure.
@Todd C. Yes, maintenance and management expenses are included when calculating NOI.