I recently received a call from a seller that owns two 6-unit buildings right next door to each other. He really wants to get rid of them both because he manages all his properties on his own, and these are adding a little too much work for him.
He is interested in owner financing the property to me. My question is how do I determine the value of the properties?
Where do I begin to start determining the value?
Thank you all in advance for your advice!
@Quincy Miranda you need to take the Net operating income. From my understanding this is the income after all expenses are deducted except the mortgage (P and I) payment. Take this number and divide it by the cap rate for that asset class in that area usually .05-.08. Then that’s the value of the property.
Let’s say NOI is 50k. 50000 divided by say a cap rate of 6 (.06) gives a value of 833k
thank you so much! I love the example that will definitely help me
@Quincy Miranda the approach that @Caleb Heimsoth describe is how to find the value of a multifamily. If you want to determine the price you are willing to pay you will first need to determine your goal in owning the property. If it is cash flow you will need to determine how much cashflow you want to make each month from the property, then work backwards.
if you want to cashflow $1,500 per month from the 6 units you will need to add up the monthly revenue (rents) then subtract all your monthly expenses. the variable in your expenses will be the mortgage payment. set the equation so that your revenue - expenses = $1,500. that will tell you how much of a mortgage you can afford to meet your cash flow goal, which will allow you to determine the purchase price.
To add to what @Josh Dillingham said, if the rents are not up to market, you can also run numbers on what it would take to bring the units up to market and how much more rent you can get. If you can raise the value enough through forced appreciation, you could refinance (or just put financing on it in the first place in your case with owner financing) to pull out equity and purchase another property, (BRRRR). You don't have to do this but it can help with your decision to buy or not if you know you can do this in the future.