Fully Leased Multi-Family - How much to offer?

Question

Hello BP, I'm looking for feedback on a property we are analyzing. Please advise on what we should offer for max ROI based on gross income and expenses.

Market Price = $275,000.00Annual gross income = $36,000.00 Annual property taxes = $4,200.00Annual water, sewer, trash = $5,256.00Annual insurance = $3,180.00 estAnnual NOI before P&I = $23,300.00

Any and all feedback is greatly appreciated. Thank you.

Aaron

Aaron Laverne · Answer

Thanks for all of your insightful input. We will calculate estimated capital expenses into the mix to see where to present our offer. This is our first property so we have not fine-tuned all of our analytic skill sets just yet.

Thanks again and we will reach out in the future for additional insight.

Aaron

David Boroughes · Answer

If you are in a competitive market, this could go for all, if not more of asking price. Using simple math, at the figures you've presented, the property returns over 8%, where I am, that is a great return.

How long has it been on the market? Any other offers? If you are the only interest at this point you should be able to get it for lower than ask.

Steve Vaughan · Answer

I should have pointed out ALL expenses except debt service to get to NOI.   Thanks for coming in and setting me straight, Bob.

Account Closed · Answer

Steve, if his "required" cap rate is lower than the actual "market" cap rate as per the comps he will be overpaying. Also you should only subtract operating expenses to get Net Operating Income.

Steve Vaughan · Answer

Hi @Aaron Laverne.  Is this a commercial property, over 4 units?  Or <= 4 units?  They are valued quite differently in the marketplace.

To run some financial metrics on this, we need to know more than just the fixed costs.  The age, condition and area of the property will determine vacancy rates, repair and maintenance expenses and cap exp estimates.

I would first get to my effective gross income (gross - vacancy and collection loss), then subtract my best estimates for ALL expenses, including management.  That will give you your NOI.  From there it is easy to value based on your required cap rate.  Good luck!