Evaluating a Multi Unit Building

13 Replies

BP Community - When evaluating/purchasing a multi-unit, are you typically paying the Present Value or Future Value. Everything I've seen/read to date has said to buy at the current value, however many of these properties are marketed at their future value. We're looking at a deal right now listed with the following numbers: 

4 Unit Building - Asking 49,9

Future:

$550+ per unit = $2200 per month income.
Yearly income $26,400
Taxes $4250
Utilities $5150
Insurance $650
Total expenses $10,050
NOI $16,350

Actual:

Unit 1-3 = $1275/mo (Unit 4 - Vacant)

Gross Operating: 15,300

Taxes $4250
Utilities $5150
Insurance $650
Total expenses $10,050

NOI: $5,250

It also needs about 18k in repairs. 

Any input on this deal and general evaluation tips would be greatly appreciated. Thanks!  

Interested in this topic. 

I am making as assumption that you would evaluate the deal based on expected rents providing that you are including the renovations in the analysis.

Current Rents:

425 a month a unit

425 X 4 = 1,700 X 12 = 20,400 expected annual gross income

Landlord paid utility.

20,400 GEI X .40 ( 60% costs) = 12,240 NOI

Sounds like these are low income units and area is marginal at these rents.

12,240 NOI / 100,000 resale price = 12 cap

The numbers seem to support a deal. maybe buy in the high 30's for price. The biggest key with only 4 units is the area and the other buildings around you will severely affect the investment today and into the future.

I never count future numbers as it's puffing to try and sell it. The deal has to make sense going in and if it can't stay afloat or eek out a small profit if you can't turn it around then don't buy it. You want to at least be okay if it takes longer to turn than expected and not for it to take you under.

  

Updated almost 4 years ago

NOI 8,160 Clerical error.

@Matt Faix  

Is it a local property?  If so, what neighborhood? 

Originally posted by @Joel Owens:

Current Rents:

425 a month a unit

425 X 4 = 1,700 X 12 = 20,400 expected annual gross income

Landlord paid utility.

20,400 GEI X .40 ( 60% costs) = 12,240 NOI

Sounds like these are low income units and area is marginal at these rents.

12,240 NOI / 100,000 resale price = 12 cap

The numbers seem to support a deal. maybe buy in the high 30's for price. The biggest key with only 4 units is the area and the other buildings around you will severely affect the investment today and into the future.

I never count future numbers as it's puffing to try and sell it. The deal has to make sense going in and if it can't stay afloat or eek out a small profit if you can't turn it around then don't buy it. You want to at least be okay if it takes longer to turn than expected and not for it to take you under.

  

Joel,

You have an error there. With landlord paid utilities the NOI is lower than 50%, so NOI is actually $8160. So maybe you want to make that correction and re-post your thoughts.

@Matt Faix These numbers look simplistic and I would not rely solely on them for the purchase.  Vacancy rate, maintenance, local business license tax/expenses, property management (unless you want to manage it forever and ever) are the most glaring.  I could easily see $5K+ disappearing with just those.

But to answer the question you pose: Pay future or current value?  If you will absolutely, 100% know what the future value will be, maybe.  (And LMK who will win the Super Bowl this year, too.)  Otherwise, pay today's dollar for what you get today.  And make sure it's valued as a commercial asset and not a common residential property.  It is only worth what it brings back to you and not a dollar more.

Good luck.

Hi Steve,

Yes let me go and fix that. I do so many posts so quickly between other things.

Just a function of going so fast with posts..... : ) 

I can see trying to buy in up and coming neighborhoods for appreciation but I would never base my cash flow analysis on future numbers. What if it doesn't appreciate as projected and you've got little to no cash flow?

Yes NOI 8,160.

25,000 in repairs.

8,160 NOI / 70,000 resale price = Resale 12 cap

Minus 18,000 repairs = 52,000 break even

So even buying in the 30's range it doesn't leave much upside unless you can get the rents up as speculated.

I am not sure if it is the way the original post was written, but I think there is too much emphasis being put on "future" especially with the reference to appreciation.

To me this is a current vs. post rehab analysis.  I know I am making an assumption here, but I believe the higher rents Matt is referring to are a reflection of the renovations not a prediction of where rates are going in the future.

If he has done his research and apartments in that area go for $550+/month, then they should be factored into the analysis somehow. 

I buy at the current value.  It happens all the time with Multi's where the seller talks about the upside on rent. If that neighborhood or building can command an extra $100/mo per unit then why aren't they getting this increased rent?  As the buyer you have to incur the cost of the turnovers. You have the cost of repairs, vacancies and you will be collecting lower rents until you get the building turned around.  

Thanks for all of the replies. I was figuring along those lines as well, but wanted to confirm. It doesn't make sense to pay a higher price based on current conditions, repairs needed, vacancies, etc.  It sounds like this is fairly common practice too, people marketing and selling the potential of a multi unit property, rather than the actual current state/value in today's market. This is all great feedback, thanks again.

Originally posted by @Joel Owens:

 $100,000 resale price

@Joel Owens:

Where did the $100,000 number come from?

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