What to pay for existing, cash-flowing properties?

Member since 2021 · 27 posts · 10 votes

I'm in Syracuse, NY and have a portfolio of properties I'd like to buy. Market value for all 3 properties (1 single, 1 duplex, and a 5-unit) is about $400k; net cash flow is about $60k a year, and seller is asking $825k (which is very high).

What is fair and typical to pay for an existing investment property with tenants already cash flowing?

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Joe SplitrockPro Member

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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

@John Timmerman I think the confusing part here is you said market value for all three properties is $400K and seller is asking $825K. Market value is what the properties are worth in todays market. That means the seller is asking double fair market price or you are misusing the term "market value".

Their net operating income isn't including repairs, CAPEX, management or vacancy. In fact, the 2021 don't even appear to be precise numbers, because they are all even numbers. Since 2021 has already passed, they should have exact numbers for 2021 and it is hard to believe they had no repairs or CAPEX across 8 units. This is pretty common with real estate agents. They put up some fluffy and unreliable numbers to make the CAP rate look great. I wish they wouldn't do this, but they hide behind the declaimer, "All information provided is deemed reliable but is not guaranteed and should be independently verified."

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Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
4y
@John Timmerman Something is very wrong with your market valuation or the seller is insane. Those properties in decent condition in my market are worth way more than $400k, and it's cheap here. I'd connect with an agent or other experience local investors and get the real numbers.

Given the current market conditions do everything you can to keep this deal off market. It's the best chance you have to find a good DEAL.
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John Timmerman
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Member since 2021 · 27 posts · 10 votes
4y
@Jaron Walling seller is asking $825k, does that seem low? high? My real estate agent suggested offering $650k, but I'm trying to figure out how to calculate the value of a cash flowing property. How would you do it?
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Martin BadinelliPro Member
Member since 2021 · 6 posts · 8 votes
4y
Hey John,

I would recommend looking into both what the Cap Rate in the area, as well determining the Cap rate that you find acceptable for investment.

Not knowing a ton about Syracuse, I cannot imagine there is a ton of appreciation in that market, but perhaps the seller is factoring that in? As this is a 6.42 cap @825k, and a 13.24 @400k.

One other thing to consider would be considering opportunities to get the Unit rents up to market, if not, and figuring out other ways to increase Net Income.

Best, Martin
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Michael Dumler
Real Estate Agent · Atlanta, GA · Member since 2020 · 1k+ posts · 1k+ votes
4y
@John Timmerman yeah something is off here. 60k annual net cash flow? Are you sure that is not gross income? You'd be pulling in 5k per month in cash flow and you're stating that the owner's asking price is high? No shot.
You'll have to perform your due diligence for this one. You need to determine several conditions that stand out to me; have the tenants been paying on time, are rents below market value, do any of the properties need to be rehabbed? - And most importantly, get clarity on the numbers.
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John Timmerman
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Member since 2021 · 27 posts · 10 votes
4y
Thanks @Martin Badinelli, The cap is listed by seller at 7.6%. Not sure if these screenshots are legible. @Jaron Walling @Michael Dumler net is a little above $60k, so you are saying $825k seems reasonable? (Syracuse market is at about 12% appreciation)

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Stephen SchmittBusiness Member
Real Estate Agent · Liverpool, NY · Member since 2019 · 111 posts · 72 votes
4y
Insurance seems low if that's for 3 properties, should be almost 3 times that. If you're putting down 20% and your initial investment is around $184K your cash on cash is 33% at $825K purchase price.
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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y
@John Timmerman I think the confusing part here is you said market value for all three properties is $400K and seller is asking $825K. Market value is what the properties are worth in todays market. That means the seller is asking double fair market price or you are misusing the term "market value".
Their net operating income isn't including repairs, CAPEX, management or vacancy. In fact, the 2021 don't even appear to be precise numbers, because they are all even numbers. Since 2021 has already passed, they should have exact numbers for 2021 and it is hard to believe they had no repairs or CAPEX across 8 units. This is pretty common with real estate agents. They put up some fluffy and unreliable numbers to make the CAP rate look great. I wish they wouldn't do this, but they hide behind the declaimer, "All information provided is deemed reliable but is not guaranteed and should be independently verified."

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John Timmerman
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Member since 2021 · 27 posts · 10 votes
4y
@Joe Splitrock thanks for the feedback my friend! Maybe I am misusing "Market Value". $400k is what these properties would sell for on the residential market (primary residence) NOT as an investment property. I was only mentioning that to show the value when not including revenue potential.

Yes these numbers are very fluffy, I'll have to try to get actual numbers from last year.
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Stephen SchmittBusiness Member
Real Estate Agent · Liverpool, NY · Member since 2019 · 111 posts · 72 votes
4y
FYI my number included 3% repair and 3% vacancy after listed expenses. Adding in 10% management is a 25% cash on cash, $47k net cash flow. If your numbers are wrong you need to figure that out. I also tripled insurance.
[email protected]315-457-7170
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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y
Quote from @John Timmerman:

@Joe Splitrock thanks for the feedback my friend! Maybe I am misusing "Market Value". $400k is what these properties would sell for on the residential market (primary residence) NOT as an investment property. I was only mentioning that to show the value when not including revenue potential.

Yes these numbers are very fluffy, I'll have to try to get actual numbers from last year.

There is only one market value and it is affected by "best use", meaning whichever use drives value higher becomes market value. Owner occupied (primary residence) buyers compete with investors. One of the main reasons that housing prices are being driven up right now is due to investors creating additional demand, therefore driving up market value. This really goes back my original point. Either your $400K market value is low or the seller is very high.
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Stephen SchmittBusiness Member
Real Estate Agent · Liverpool, NY · Member since 2019 · 111 posts · 72 votes
4y
I agree with Joe, market value is what a buyer will pay. I have a feeling the 5 unit does not have a lot of comps. Every property is different, different location and condition. Find out what your targets are for cash flow, location and renovation costs, as a starting point. “Market value” is too subjective.
[email protected]315-457-7170
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Dillon Cook
Realtor · Greater Tampa Bay · Member since 2014 · 219 posts · 130 votes
4y
We're talking 8 units here right? 50k a piece seems extremely cheap anywhere
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John Timmerman
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Member since 2021 · 27 posts · 10 votes
4y
Quote from @Stephen Schmitt:
FYI my number included 3% repair and 3% vacancy after listed expenses. Adding in 10% management is a 25% cash on cash, $47k net cash flow. If your numbers are wrong you need to figure that out. I also tripled insurance.

Thanks @Stephen Schmitt, I re did my calculations aside from the sellers document and came up with about $17k in annual cashflow after all expenses. CAC with $170k down is 10.5% (at $650k purchase price)
I see you're in Liverpool. Me too. Let's meet up soon.

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John Timmerman
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Member since 2021 · 27 posts · 10 votes
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Quote from @Dillon Cook:

We're talking 8 units here right? 50k a piece seems extremely cheap anywhere

YEa its a single family, duplex and a 5-unit
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John Timmerman
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Member since 2021 · 27 posts · 10 votes
4y
Quote from @Stephen Schmitt:

I agree with Joe, market value is what a buyer will pay. I have a feeling the 5 unit does not have a lot of comps. Every property is different, different location and condition. Find out what your targets are for cash flow, location and renovation costs, as a starting point. “Market value” is too subjective.
Thank you!
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Wade Woo
Real Estate Consultant · Manassas Park, VA · Member since 2019 · 74 posts · 19 votes
4y
How did you come up with a market value of $400k? Do you have the addresses of these properties?
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Stephen SchmittBusiness Member
Real Estate Agent · Liverpool, NY · Member since 2019 · 111 posts · 72 votes
4y
Anytime, John!
[email protected]315-457-7170
Stephen Schmitt51 Review
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
4y
@John Timmerman I haven't read through all the replies but pay attention to anything @Joe Splitrock says.
My guess is ALL the numbers you have given us are wrong except the sellers asking price.
The answer to your basic question is; how much are you willing to pay for that stream of income?
1. To answer that you have to know what the stream of income really is. I doubt the numbers are correct. Turnover cost is one of the highest costs for a landlord. It is not even mentioned.
2. You also have to decide how much you want to value future appreciation. That means you have to guess what that future appreciation might be.
3. Then taking that information, you have to decide what kind of return you expect.
4. Then you need to figure out financing, and given the financing you can get will it give you the return you want.
5. Then you have to evaluate the risk. Is the return good enough for the risk you are taking. (yes there is a LOT of risk in real estate)
Different people will evaluate things totally differently. Some people are happy with a consistent 6% return on their money some people want 25%. Some people are happy with very low cash flow but count on appreciation. Others just the opposite.
Me, I am in the $100-$175k price range. I want to have about 25% equity in the property and about a 1.5% debt coverage ratio. I look at the portfolio as a whole and have rentals that generate $2000 - 10,000 a year for SFH.
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Axel MeierhoeferPro Member
Rental Property Investor · Escondido, CA · Member since 2017 · 684 posts · 550 votes
4y
@John Timmerman I am a little surprised that you are casually mixing two property types that have different valuation approaches.
The 5 unit is commercial residential that is normally valued based on rent roll. The single and the duplex are valued based on comparative analysis. You should be easily able to find out what similar properties in the same address locations have sold for in the last few months, just like an appraiser would. For the 5 unit, you should be able to get the rent role and do a market rent comparison to determine the valuation.
Stating one lump sum appears strange to me. Did you really complete your due diligence on these properties?
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John Timmerman
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Member since 2021 · 27 posts · 10 votes
4y
Quote from @Wade Woo:

How did you come up with a market value of $400k? Do you have the addresses of these properties?

The market value was given by their realty company (a massive one, Pyramid Cushman) as “assessed value”

5-unit = $180k
duplex = $120k
single = $92k

My realtor was able to get these numbers from a personal contact of his, as they typically don’t publish these numbers.

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John Timmerman
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Member since 2021 · 27 posts · 10 votes
4y
Quote from @Axel Meierhoefer:

@John Timmerman I am a little surprised that you are casually mixing two property types that have different valuation approaches.
The 5 unit is commercial residential that is normally valued based on rent roll. The single and the duplex are valued based on comparative analysis. You should be easily able to find out what similar properties in the same address locations have sold for in the last few months, just like an appraiser would. For the 5 unit, you should be able to get the rent role and do a market rent comparison to determine the valuation.
Stating one lump sum appears strange to me. Did you really complete your due diligence on these properties?

All properties are owned by the same owner. And are brokered by the same realtor. They are being sold as a portfolio. I have done individual numbers on each property at $400,000, $650,000 and $825,000 purchase price.

as I'm new to real estate investing I'm not really sure what my "sweet spot" is. But all three numbers come out to be something that other people have found valuable as far as cash on cash and CAP.

I already have financing lined up through personal mortgages for the single and duplex, and I have a commercial financing lined up for the five unit. The reason is I couldn’t find a lender that will do the whole portfolio right now. And even if I did, the rates would be much higher. All these amazing answers seems like they’re leading me to just pick a number that I feel OK with paying this property for, and can live with… As all the other numbers are pretty set as of now. Current tenants are long term and property is already cash flowing pretty well.
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
4y
@John Timmerman Assessed value is simply the amount you pay property taxes on.
"Assessed Value" is notorious for being way off. It can be very low or really high or it can be about right. There is not enough consistency to use it for any purpose other than to know what current property taxes are.
Theoretically assessed value is supposed to be Market value, but it rarely is.
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John Timmerman
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Member since 2021 · 27 posts · 10 votes
4y
Quote from @Ned Carey:

@John Timmerman Assessed value is simply the amount you pay property taxes on.
"Assessed Value" is notorious for being way off. It can be very low or really high or it can be about right. There is not enough consistency to use it for any purpose other than to know what current property taxes are.
Theoretically assessed value is supposed to be Market value, but it rarely is.
Got it. Thanks for the eduction my friend.
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Wade Woo
Real Estate Consultant · Manassas Park, VA · Member since 2019 · 74 posts · 19 votes
4y
Oh $400k is the assessed value of the 3 properties. Have you asked a realtor to do a CMA on those properties? If you DM me the addresses I can show you how to do a comparative market analysis.
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Robert Beardsley
Member since 2020 · 117 posts · 84 votes
4y
the question is why wouldn't you just go buy 8 properties at 400k and rent them out. this is very confusing post
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