Evaluating an opportunity

8 Replies

I am considering the purchase of two fourplexes (8 doors - side by side, owned by one individual). I have been using the Bigger Pockets rental property calculator to help analyze the deal. I'm not sure if my cap ex and repairs expenditure percentages would be different from analyzing a SFR. It seems there should be some benefit inherent with having eight doors under two roofs, but wanted to get a little feedback on this. (I am somewhat of a newbie...)

I stay away from complexity, if it does not make sense on the back of an envelope a spread sheet will not make it any better.

Two 4 plexes will definitely have economies for repairs and capex compared to 8 SFR's or 4 duplexes. Collect your own numbers, don't rely on the listing, if it still looks good from a cash flow perspective you could make an offer subject to an inspection and seller financials. If a deal does not work for today it does not work period IMO.

I agree with Bjorn in keeping it simple so instead of using residential analysis why not simply find out what the avg. multi CAP rate is in the area and divide the ROI by that to come up with a solid offer number. The right selling price can force any COMMERCIAL deal to work based on CAPs!

@Robert Caturano

Most multi-family property owners should have some sort of bookkeeping/record keeping. If you're serious about this deal, I would as the seller to provide you with a 1-2 year operating history, that should include maintenance/repair costs. This way you can compare what you're projecting to the actual numbers. Of course, the seller isn't "required" to send you these, but I would ask anyway.

I own many multi-family buildings and in general you're correct - owning 2 4-plexes will probably be cheaper (maintenance, cap ex wise) than owning 8 SFRs. With that being said, multi-family properties may attract a lower class of tenant who will impose more wear and tear on the property, so it's not a straightforward answer.

Thanks all.  I have asked realtor for cap rate info and am pursuing any operational expenses they would be willing to share.  Hopefully I will receive some useful info.  

@John Acheson - I have received info from seller. I'm using NOI and dividing by CAP rate. Asking price way beyond the value I've calculated. (You said ROI instead of NOI to divide by cap. Are you using those terms interchangeably?)

Originally posted by @Robert Caturano :

@John Acheson- I have received info from seller. I'm using NOI and dividing by CAP rate. Asking price way beyond the value I've calculated. (You said ROI instead of NOI to divide by cap. Are you using those terms interchangeably?)

I would prefer to use the Net Income reported on a bonafide tax return rather than a calculated return based on assumptions. It also provides leverage because most all tax-payer sellers will under-report income to pay less taxes and therefore the offer price will go down. But in a sellers market low offers are tough. Maybe wait it out a few years to see if this trade war and market volatility drops values and turns everything into a buyers market. When do you think this expansion cycle will end?

Originally posted by @John Acheson :

I agree with Bjorn in keeping it simple so instead of using residential analysis why not simply find out what the avg. multi CAP rate is in the area and divide the ROI by that to come up with a solid offer number. The right selling price can force any COMMERCIAL deal to work based on CAPs!

While that sounds good in theory, it could well result in too much being offered! ie. What if sold comps for 4-plexes aren't as high as what the commercial cap rate for the area would suggest? ie. What if the multi-apartment investors-market was hotter than the owner-occupier market?

ie. Sold comps values rule the 1-4plex market. In this case, it does look like the OP has suggested that the asking price is much higher than the preferred returns would justify, which probably just means: the Seller is not motivated to sell lower than market. ie. Time to move on?...

This thread has been of great value to me.  Tax return info, prop management data, etc all indicate asking price is unacceptable.  Either move on simply offer what it’s worth- which may be offensive.  My BiggerPockets community may be helping prevent some problems for me.  Sincere thanks to each of you.  @Anton Ivanov - just listened to your coach Carson podcast the other day.  Congrats to you on your successes.  Inspiring!

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