Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
Hello BP!
I came across an 8-plex with the following characteristics:
Built in 1982, renovated in 2010
Located close to Dallas Love Fields airport, across the Bachman lake
8 units, 1bdr, 640 sfq
100% occupied with 6 tenants on month-to-month lease
$495 monthly rents
Gross rent: $45240 (2013 actual)
Actual expenses: $18770
Property management is done by the owner
Tenants pay for electricity; owner pays for water/sewer/trash/etc.
Building is said to be in the good shape
NOI for 2013: $26470
Current owner is in the process of raising rents to $525/mo.
If I use their 2013 numbers and project them to 2015 with the addition of property management (10% of gross), I arrive to NOI of $22K which is close to 50% rule.
How much should I offer for this property? The asking price is 330K and is based on 8% cap rate.
Of course all numbers are subject to verification and whatever offer I may make will be contingent upon due diligence.
You need cap rate comps from comparable sales to get the market value.
I see 8-9% cap rates in for-sale listings for class C properties all the time but where do I get the actual caps? Also, 8% seems to be low considering that the building is 100% occupied which may not always be the case.
There is no cap rate comp until a property's NOI has been analyzed and a purchase is completed. It will probably be difficult to get accurate cap rate comps for that size of building. Better to just find what GRM's properties are selling for. Then you just need rents for buildings sold. The cap rate number can be 6% and still be a deal if other properties have sold at 4%. And a 10% cap can suck if properties are selling at 12%. You have to have the cap rate comps, accurate ones to utilize this method.
Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
11y
Originally posted by @Account Closed:
You need cap rate comps from comparable sales to get the market value.
I see 8-9% cap rates in for-sale listings for class C properties all the time but where do I get the actual caps? Also, 8% seems to be low considering that the building is 100% occupied which may not always be the case.
Investor · San Diego, CA · Member since 2014 · 22 posts · 8 votes
11y
At $330k I would not be very excited about the per door cashflow or the CAP rate. As @Account Closed said you'll need to compare the CAP in context of what that area of the Dallas market is supporting. Even within the local market whether this is a good or bad deal can depend on other variables like location (e.g. is this a desirable property or conversely is this a poor location?). I am not a Dallas expert but having recently browsed the market there I suspect with some digging you can find closer to 10% cap on good properties.
Taking those numbers at face value I'm thinking the property begins to get interesting below $270k.
Rental Property Investor · Dallas, TX · Member since 2012 · 502 posts · 263 votes
11y
I don't have much experience with larger multifamily, but I would suspect your expenses would be closer to 60% with property management. It depends on how much maintenance has been deferred, and you are also paying for water.
You also need to look at surrounding lease comps - just because the owner is trying to raise the rent doesn't mean the market will necessarily support it.
Seems like there is potential here, but needs lots of due diligence. In my experience it's been tough to find multifamily properties in DFW where the numbers make sense, so I hope this one works out!
Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
11y
@Andrew Herrig, I added PM (10% of gross) to the last year expenses and got 22K NOI. That's a little more than 50% but not 60%. If I use 60% the NOI goes to $18K and my potential offer would be no more than $200K.
I used rentometer.com for lease comps and it shows $470 avg. rent which is below current rent of the subject property.
The owner claims that everything has been fixed in 2010 and has a long list of items that were fixed.
You need cap rate comps from comparable sales to get the market value.
I see 8-9% cap rates in for-sale listings for class C properties all the time but where do I get the actual caps? Also, 8% seems to be low considering that the building is 100% occupied which may not always be the case.
There is no cap rate comp until a property's NOI has been analyzed and a purchase is completed. It will probably be difficult to get accurate cap rate comps for that size of building. Better to just find what GRM's properties are selling for. Then you just need rents for buildings sold. The cap rate number can be 6% and still be a deal if other properties have sold at 4%. And a 10% cap can suck if properties are selling at 12%. You have to have the cap rate comps, accurate ones to utilize this method.
Investor · Aiken, SC · Member since 2014 · 398 posts · 120 votes
11y
Hey @Nick B. I'm not sure what your market is like, but my big concern would be the fact that all these units are single bedroom units. Seems to me that you will have higher tenant turn over and a smaller target market than a building with a mix of 1, 2 & 3 bed rooms. Not trying to rain on your parade, just something that you might want to give some thought to.
Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
11y
Hi @Jesse Waters . You have a valid concern. The owner claims that most tenants have been living there for 5+ years. All tenants are single except for a family of two. Don't know if it's good or bad.
@Account Closed, I know what you're saying but I don't know where to get actual sales numbers for nearby properties. Rents are easier - they are advertized. Overall the going cap rate for C class properties in DFW seems to be between 8 and 9%. That's what I see on Loopnet or M&M listings and I heard similar numbers from a few local people. I guess if I can buy it at 10% cap I should be OK.
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
I would NOT use a cap rate that I did not have the actual NOI calculations. You are just looking at made up numbers. I would also not buy a property if I did not have comparables whether they be sales comps, cap rate comps, GRM comps or even just $ per sf.
Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
11y
@Account Closed, I got a report from CBRE with the following stats regarding Dallas and that particular sub-market: occupancy 94.8%, rent per sqf $0.88, cap rates for C properties 6.5-7%. Do these numbers support the asking price?
Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes
11y
How will you manage it? FYI: An 8 plex is too small and will not generate the amount of cash you'll need to afford full-time management. Generally the minimum is 60 units or more in order to generate the kind of cash you need to afford an office employee and one or two maintenance people.
I know some investors that acquire 30 to 40 unit complexes, but buy these complexes close to each other and have them both managed by the same employees.