14-Unit Multi-family - How to figure out value for price point?

Question

Looking for help on figuring out what this complex in Nashville, TN, is worth so I don't over pay. I will likely syndicate or wholesale the property.

I don't know standard cap rates for the area, but the area is Madison, TN, which was historically low-income, but houses are being rehabbed and rents are going up as affordable housing within 15 minutes of nashville is slowly disappearing. Here's what I know:

Seller uses 2 2-br units, and rents 2 2-br unites and 10 1-br units. She claims her net income was $97k in 2016. Seller is asking $925k but isn't particularly motivated.

• gross monthly income is about 8900 with section 8 tenants mostly.
• property in great condition except for old aluminum windows and parking lot is a little beat up.
• Taxes $10k annual
• Insurance $4300 annual
• Let's assume $15k maintaince annual
• Assume $15k capex
• Assume 8% vacancy

That puts her current cap rate at about 5.7%

Value-add cap rate after we purchase, by renting those two unused units, goes up to 7.6%

What can I pay for this place?? Thanks everyone!

Steve Vaughan · Answer

Last time I bought a couple older complexes slightly on the shady side of the tracks (in '03 and '07), I got two 1.4%/mo producers at a 12 &14 cap.  The CAP rate now in the area has compressed down to 7.5. There was deferred maintenance and the sellers were motivated.  You are looking at a .96% producer and need a fee to pass this along.

You do need to know what the market cap is for this area and for this type/age/condition of asset.  Call commercial brokers and property managers to get an idea.  Without knowing the market cap, you'll be missing a key financial metric that helps determine value.  Good job for knowing you need to know it and referenced that you don't yet.

Lastly, we buy on actual returns and condition, not after the value-add or ARV.  My gut says a 5.7 isn't nearly enough return for the risk and PITA you or your end-buyer are about to take on.  The seller isn't motivated to boot.  Price it at a 7.6 just for the fun of it and mention that in conversation.  If she owns it free and clear, include seller financing as an option in your LOI if you get that far.   Will have a larger pool of buyers for a SF deal of course.

Some of my best 'deals' have been the ones I didn't buy.  Good luck and please keep us posted Allan Smith!

JD Martin · Answer

Quoted for truth! More than once I have thought "Boy am I glad I didn't buy that place". Of course, more than once have I thought "Boy, I wish I would have bought that place". :D

Austin Fruechting · Answer

Ok, so let's just say $850 for the 2beds and $700 for the 1beds.

$124,800 in annual gross rents.

Expenses:  I would assume around 50% +/-

NOI: $62,400

CAP: 6.7%

Assuming you don't have to put anything in to it immediately.  If you have to put $100k into it right away you're in it for $1,025,000 and that's a 6.1 CAP for section 8 tenants.

Austin Fruechting · Answer

That's crazy.  You need to verify a lot more numbers if you're going to syndicate or wholesale this.

Gross monthly = 8900 = 106,800 per year and she's saying her net was $97k?

What do the units actually rent for?

Michael Puwal · Answer

Hello. I am looking for a building such as the one you mentioned in this area. Contact me to discuss?

Allan Smith · Answer

This is great. Thanks everyone.

So based on what she's told me, it's safe to assume that her annual NOI is close to $53k.

I'll need to find out the cap rate that people look for in the area, but here would be the valuation:

8% cap = $660k.

6% cap = $880k

5.7% cap = $925k

So only if cap rates have gone all the way down to 5.7% for the area would her price be reasonable. According to this BP article, this type of property should have an 8 - 10% cap in most cities.

Sounds like if I really want to know what the property is worth, I'll have to reach out to some brokers. Not sure how to find them but it probably won't be hard!

Jeff B. · Answer

I've always objected to the thought that some caprate in a specific area determines value for all sales in that area - - BS - - that's an invalid use of the metric.

see the fallacy here.

Try  NOI * GRM -> FMV;  Yes the GRM is an arbitrary number but you know it when using it.  GRMs should hover between 9-12 and when I sold my MFU, we used 11.5 to set the FMV and got a full price offer.

Now you can compare YOUR caprate to that of the area and there can be significant differences.

Allan Smith · Answer

@Austin Fruechting Yes, we would verify all the info once under contract. These are rough numbers.

But you do make a good point. Maybe she/I meant her gross was $97k once vacancy is factored in? Either way, I don't think we need that number to value the property.

The 2-BRs start at a base rent of $825. She's adds $25 for the 2nd person, again for the 3rd, and so on.

The 1-BRs start at $700.

14-Unit Multi-family - How to figure out value for price point?

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