How to value a 30-unit

Question

I've been looking into a 30-unit complex. My present method of cost analysis says i should buy it for $500k, but when i compare it to other deals I've seen being made, it shows I should buy it for $750k. What factors should i look into when putting together my purchase price (i.e., cash flow, equity, price per door, etc.)? Here's my current analysis. Thanks in advance for any insights or help!

Todd Dexheimer · Answer

This is hard to answer without knowing more. The vacancy rate, management fee and repair/maintenance amounts you are using are high. This tells me that you are buying an old building in a D area or a small town. Some questions to answer:

1)What is the current vacancy rate in your area/sub-market?

2)What are property managers charging (30 units should cost around 7-8%).

3)Maintenance expenses usually aren't 16%, so why are you using that #?

4) What is the market Cap rate in the sub-market/asset class? Your are using 10%, which is high in most every market today.

To me this could be a deal at $700k, but with the limited information it is impossible to say

Roy N. · Answer

Paul:

My question was partially rhetorical, but I think the 50.9K cash-flow is not correct.

Your dilemma above illustrates why we care little about CAP rates when underwriting a deal.  If you underwrite to a rate of return which meets your objectives, you will know the price you can pay for a property.    Because someone else might pay more, does not mean you are necessarily off on your numbers.   In our own markets we have been seeing institutional/corporate apartment operators and foreign buyers paying prices which would sentence us to 10-years of drudgery, followed by marginal returns.

Why?  Their objectives and costs of capital are different than ours:   Foreign buyers are often  looking for preservation of capital and care little about any rate of return above that.  Corporate buyers are using shareowners capital and may be strategically looking to dominate a market.

We've underwritten several 16 - 80 unit properties in the past couple of years and, in most cases, have been out spent.   You just move along to the next opportunity.   IMHO no property is preferable to one for which you overpaid ... while I enjoy making old buildings energy efficient, I'm not buying buildings, I'm buying businesses and rule 1 is "Never loose money".

Paul Sweetman · Answer

How much cash flow does it generate? $50.9 K per year

I've always been told I make my money when I buy a property and I know when this occurs I make good cash flow.

As I'm trying to enter the world of larger multi-families I am being told my offers are too low. I lost a deal where my number said 1.3 mil was my top price the property sold for about 2 mil to an out of state investor. How can I be .7 mil off in my numbers?

I look at cash flow, differed maintenance, any and all monthly outgoing money I can put my hands on and develop a number.  Should I be factoring in tax depreciation?

I feel I'm on the right course but I keep hitting road blocks.

Roy N. · Answer

@Paul Sweetman

It's a business first ... evaluate it as a business.

How much cash flow does it generate?

What are the conditions of the primary assets and how much near-term re-investment is required?

What would be the anticipated growth of the business (more cash flow) arising from re-investment ... what is your rate of return?

Looking at your list above I'm not sure you have the full picture.  I do not see any utility costs (electrical, water & sewer, gas, etc) or landscaping/snow removal.  What about administration and accounting ... is that bundled into management?

When it comes to management, you are going to have a live-in super whom you can pay in cash + rent allowance.  Additionally, you would pay a PM to handle all of the aspects not part of the Super's day-to-day at probably 5%.

Reserves also strike me as low ... (and maintenance may be a little high, unless the property is in very poor shape).

How to value a 30-unit

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