Multi-Family Purchase Analysis

14 Replies

I am new to BiggerPockets but looking for a second or third opinion on a multi-family purchase analysis in Fort Wayne, Indiana area.  I am looking at a 15-unit property.  I have run it through the BP Calculator using expenses provided by seller and some of my own assumptions.  Current monthly income is $10,225, my assumed operating expenses (excluding loan pmts) are $4,996.  Is there a quick way to calculate what I should offer or ultimately pay?  The property is off-market and this was the result of a letter so the owner is not extremely motivated to sell.

So many questions...

So, total income is ~$10k or the NOI (net operating income) is ~$10k?

Gross income currently is $10,225 & expenses are $4,996 so NOI is $5,229. I have used the BP calculators & some of the guidelines recommended by Brandon turner but I'm not getting the same results he recommends so I'm trying to decide if I take the plunge or forgo the deal until I have a larger down payment. I want to get into sheriff sales in order to flip a few to put more money down on MF but this deal came along and I haven't been able to get any traction at the sales.

@Kris Miller

There really isn't a quick way to determine what to pay.... There are a lot of moving parts to multis. I would first verify the owner supplied expenses. My next move would be to determine your market cap. This will tell you what it is worth and most likely will sell for..

I would then go back to the expenses and income. Is there a way to reduce expenses?? Boiler upgrade? L.e.d fixtures? Low flow showers, 1.6 toilets? Is your garbage contractor fair? Is your snow/lawn contractor fair? Is there room to appeal your assessment?? Can you do better on insurance? Find something you can improve on..

I would next move to income... Are they at market? Could the units/building use any cosmetic upgrades that would merit higher rents? Can you improve on the occupency?? Better marketing?

If you can answer yes to a few of the above. I would then offer what the market cap and noi dictate.

Hope this helps.

Peter 

@Kris Miller I won't claim to be an expert, but here are some thoughts to consider.  Many are similar to what others have said.

Regarding coming up with an offer amount, something you could do next is determine a CAP to use for that property. Difficult to do, because there are many variables that drive CAP rates. One variable is recent sales of comparable properties in the market. Another variable is class of property (general guidelines are A=4-7% CAP, B=7-8.5%, C=8-12%, D=12+%). Another variable is the condition of the local market (e.g. hot markets with higher prices bring CAP rates down). Best to talk to a local real estate professional (e.g. commercial broker) for insights on CAP rates. But once you have an appropriate CAP rate for that property, you can divide NOI by the CAP rate to get a starting point for market value of the property. From there you can consider other factors such as rents, deferred maintenance, required rehab, your required returns, etc and land on an offer price that's supported by data.

There's a lot of material out there about negotiating with unmotivated owners.  Avoid the temptation to be so enamored by the property, or be so urgent to lock in a deal, that you bypass the analysis and make a rash decision.  I'd recommend establishing your bargaining range (starting with your ideal price and ending with your walk-away price) along with defining your best alternative to no agreement (e.g. holding onto your money for something better).  Go into the conversation with the stated goal of coming to a win-win agreement, and be creative in finding ways to make the owner happy while getting what you want.  If it can't work, don't be afraid to walk away... as hard as that may be to do.

Hope there's a nugget or two in there that helps.  Good luck!

@Kris Miller if you want to try to find the cap rate in your area check out IRR.com they have market specific surveys by asset class so you can look up multifamily. The only problem with that is that they only track the largest metros.

Like someone suggested talking to a local commercial broker would be the fastest way, to locate one just see if anyone has a listing close to your property on loop net and go from there. 

Hey Kris, I have been in multi family for 13-14 years, closed on 3 so far this year and have 2 under contract.

Here is how I do my "quick analysis" on commercial apartment buildings:

If it is >85% occupied and a B or C asset:

1) Take gross collected income
2) assume a 50% expense ratio
3) decide you NOI by .08

That's my strike price.

So if you said 10,800 Gross
Take 5,400 and divide by .08
67,500 would be my starting point.

Then if that number seems to work for the property, good. If you need to mobile it around a little, good.

Just a tit bit, I like your expense assumption; many sellers try and pretend like the expense ratio is 15%, 20%, 25%, 30%, or 35%...

I have not yet seen that truly happen with B&C assets. Always between 40% and 60%. I'll argue that to the grave.

Good luck!

Updated about 1 year ago

*"Move" (not "mobile")*

Updated about 1 year ago

*"Divide" (not "decide")*

What would you do if it’s not greater then 85% Adam ? How do you shift the numbers ?

@Adam Adams  (& others) thanks for the input, I appreciate the advice. I would call it a lower Class B, well maintained property. The property is 100% occupied. I have the following monthly expenses accounted for:

Vacancy 613

CapEx 818

Repairs 511

Util 100

Insur 420

Lawn 1000

Trash 75

Taxes 947

Mgmt 511 (which I currently do myself)

With your formula I think I am coming up with an offer of 766k. The asking price is 700k. If I finance with 0 down (using all equity from a couple other properties) I am coming up with cash flow of 643 or 43/unit. This is a far cry from what Brandon preaches of 100/unit/month. Am I missing something? Should I not include mgmt fees since I do it myself? How do I investigate rent ceiling? Or do I walk away until I have more DP? I know it’s all a “numbers game” and I feel like I grasp the numbers but I don’t know if I am overlooking something or unrealistic in my expectations. My first MF (a 20-unit) kind of fell in my lap and I barely even analyzed it before going into contract because my gut said it was good and it has been for the past 5 years. I have analyzed this one to death and am starting to look cross-eyed! 

The question is "Is this building done?" meaning, is there nothing going to change with this place?  Do you believe that you have nothing of value to give to this property to move the expenses or the revenue?  We NEVER use current figures to determine value because...why would you unless you were not going to change a thing.

When you say "lower class B" I am thinking class C.  A class C property isn't class C because of the season.  It is Class C because of the state of the property or the state of the neighborhood.  

If it is because of the property, my guess is that you don't want to keep it at a "C" so that means you are going to be putting money into it.  It also means that you are going to be running it (hopefully) more effectively than your predecessor so your operational costs may decrease as your cap ex will increase.  Your revenue will increase as well.

If it is because of the neighborhood, I would move on to another deal...

@Kris Miller as far as cap rate goes, I just received the appraisal for an 8 unit deal I have under contract here in Warsaw.  The appraiser was from Fort Wayne and used a cap rate of 8.44%, just to give you some insight.

Originally posted by @Fritz Ritter :

What would you do if it’s not greater then 85% Adam ? How do you shift the numbers ?

For that information, you can reach out an apartment investor who focuses on repositions (I know there are lenders out there for bridge loans & hard money loans).

I have never purchased anything like that; all of mine have been focused on buying a cash-flowing asset.

From my experience, long term financing isn't available unless it's >85% occupied, so I have always passed by those "opportunities". 

Good luck!

-AAA

@Adam Adams Thanks Adam , apartment buildings are forsure in my future plans . I like to practice evaluating and watch certain transactions to get better at running numbers so all information helps . 

Originally posted by @Kris Miller :

@Adam Adams (& others) thanks for the input, I appreciate the advice. I would call it a lower Class B, well maintained property. The property is 100% occupied. I have the following monthly expenses accounted for:

Vacancy 613

CapEx 818

Repairs 511

Util 100

Insur 420

Lawn 1000

Trash 75

Taxes 947

Mgmt 511 (which I currently do myself)

With your formula I think I am coming up with an offer of 766k. The asking price is 700k. If I finance with 0 down (using all equity from a couple other properties) I am coming up with cash flow of 643 or 43/unit. This is a far cry from what Brandon preaches of 100/unit/month. Am I missing something? Should I not include mgmt fees since I do it myself? How do I investigate rent ceiling? Or do I walk away until I have more DP? I know it’s all a “numbers game” and I feel like I grasp the numbers but I don’t know if I am overlooking something or unrealistic in my expectations. My first MF (a 20-unit) kind of fell in my lap and I barely even analyzed it before going into contract because my gut said it was good and it has been for the past 5 years. I have analyzed this one to death and am starting to look cross-eyed! 

Chris:

1st (regarding the purchase price): 

-Most people in the business would define  "NOI" as an annual figure. I was 1/12th of the price you have, because I used your Monthly figure; knowing that, you are perfect at $766k! 

-The only factors that would change that number is if the local cap rates are above the 8%, in which case you should use the local cap rate instead. So if you are in an area with an average cap rate at 8.5%, than your strike price would be closer to 721K.

2nd (regarding the cash-flow):

-If you are getting a deal that is 100% leveraged, I can see why you don't have at least 100/door. 

-If it was me, I'd probably do a nothing down deal to cash-flow $43/unit, as it is an infinite cash on cash return.

-I am also guessing if you had 20% or 25% down, that you would be cash-flowing 100/door. 

3rd (regarding your expenses):

-honestly your expense ratio looks pretty good, I would anticipate doing better than a 50% expense ratio.

-Why are your lawn maintenance bills so flippin high!? I give you a 80% chance you can get that down around $400/mo and hugely increase your property value. 

@Kris Miller my two cents and a simple formula is 50% rule.So if the net revenue is $10225x 12 =122700 divided by 2 is $61350 (NOI)
multiply by 10 (cap rate which is variable depending on the situation of the building) So the strike price would be $613350.

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