Evaluating an Investment-ADVICE?

Question

We have an opportunity to purchase a portfolio of about 30 doors (22 SFH/Duplexes).   How do I determine the desired CAP RATE/Price?

I have rental amounts (about 15% below market), all are on 1 years leases with auto renew and 5% rent increase (100% occupancy).  15 roofs are new and the rest are less than 10 years.  Older properties (1950-1960s).  I have rents, taxes, insurance and their maintenance costs.  It is out of state and I am not familiar with it, however, I have talked with a local agent that has lived there all of her life. The area is smaller but has had consistent growth over time with military logistics and several large employers along with a Hospital (sorry if that is too much detail).  Some crime but not terrible.

We are new to this type of investment so not sure how to determine the right price.

(Then...we'll find investment partners...and figure that out too!)

Thank you!

Drew Sygit · Answer

@Tracy Hoggard use the BiggerPocket evaluation sheets - you'll need to create 22 of them!

Or, you can recreate your own version in Excel and create a column for each building to make it easier to make changes.

Corby Goade · Answer

Sounds like an interesting deal, congrats!

This is the challenge on a deal like this- it's easy to determine the gross income, becuase you'll have the leases (presumably) to review during DD. The real rub is that you can't determine a CAP without the NOI and you can't get an NOI without having actual operating expenses. 90% of the time, you won't get the full or honest picture from the seller. So- you have to guess a bit.

In my opinion, you need to develop an actual proforma based on what you can find out and estimate based on the properties and info you can get from the seller. That CAP should put you close to actual market value.

You'll also want to develop a proforma CAP, which is how well the portfolio will perform after stabilization and improvements that you've made- maybe 24 months down the road. If you can add 30% value or so through improving NOI in your proforma- that is what makes or breaks a deal in my mind.

Best of luck!

Tracy Hoggard · Answer

Thank you for your response!  We are looking at Albany, GA.  I am a Realtor so I can evaluate value the traditional way, however, I was looking to focus more on the CAP Rate...so I'll look for other investors or the property manager is a great option as we would hire one anyway!  I understand these equations but they aren't second nature by any stretch. I will keep them on my phone notes!

And, regarding financing.  I have no idea how we will finance yet.  I'm learning to say YES until No is the better answer.  Once we decide the best price, I'm sure I can find someone who would like to invest/partner.  I just don't know who that is yet-or how but I'll figure it out.  I'm open to any insights or advice on what it would look like to partner with someone.

We do have another 16 property portfolio that is very similar that we purchased in 2020.  It was seller financed with very little down so we could do that one on our own.

Austin Johnson · Answer

Hey Tracy,

looks like you're making the jump into commercial properties! congratulations.what city/town/state is this property located in? (I can assume Raleigh?) that will help determine the cap rate. Cap REALLY change from town to town. for example Houston we're looking at 4.5% cap while the town I'm in (Jefferson City,MO) we're looking at 7%.you can technically do it the slow way. try to find previous sold properties, find their Net Operating Income and divide NOI by property value to find the CAP rate. do that several times to get a range. (running sales comps) or just ask a local realtor. I'd prefer to ask a local realtor, other investor or the Property management team. to determine price here are a few equations that are literally above my computer as I type. NOI/Prop Value = Cap Rate.    NOI/ Cap Rate = Prop Value.Cap Rate * Prop Value = NOI.    Gross Income - Operating cost = NOI.with this being your first commercial deal, I have to ask if you can qualify for a commercial loan? banks typically require: 1.25 DSCR, previous experience owning commercial properties of this type. 3-6 months expenses liquid and a net worth totaling the loan amount. I don't know how new you are, so you may laugh at my comment haha. what type of partners are you looking to bring on board?