Help Analyze 85% Remodeled Almost Vacant 8 unit and Build 8 More

8 Replies

Hey all,

Long post. Questions at the bottom. Thanks in advance.
I'm still new to investing, as I only have 1 SFH so far. I was brought a pre-market deal of an 8 unit property (two 4 unit buildings) with the plan of adding another 8 units; a site plan was done previously. I believe there is more room on the property to add washer/dryer facilities and/or small playground. It is in an in demand school district and consistently safe town. I have only walked the property so far.


Property has been mostly vacant since at least Dec. of 2016. Six units have been remodeled about 90%; one unit is only about 30% but includes kitchen cabinets and appliances. One unit occupied. My biggest concern is the HVAC systems, the roof will likely need replaced within a few years, and the asphalt parking lot likely needing to be redone. Landscaping is also some concern. Exterior will require minor repairs.


Asking price is $225k. Built in 1968. Seven units are 2/1 about 725sq ft. Occupied one unit is 1/1 about 425sq ft. Only refrigerator and stove; no dishwasher or w/d hookups. Comparable 2/1 rentals currently listed are $550 and $575. Previous taxes were about $3725.

My initial questions are: Do I make a really low offer assuming I need to replace HVAC, redo parking lot, and replace roof? How would you estimate a cost of the future 8 units?

Let me know if you want any additional info. Thank you all.

Ryan

I would do your own pro forma. Figure out what the NOI is and use a stabilized cap for the area. Once you arrive at market value I would work backwards and minus what those capital improvements will be. Even at this point it will not be the value because the units are vacant I believe? The tricky part is to decide how much value do you minus to fill in those empty units. To me this will come down to negotiations. No real rule of thumb here. Likely based on how badly you want it or seller needing to unload.

Also like to add the asking price breakdown comes to 30k for 2b and 15k for 1b. Is that the market rate there? This may play in negotiations as well

Hope this helps. Good luck..

Hi Ryan,

Here is how to underwrite a highly distressed apartment deal to come up with a purchase price:

Max purchase price = stabilized value - deferred maintenance - stabilized expense loss - contingency - equity fee - other expense

Max Purchase Price: The maximum amount you can pay for the property.

Stable Value: The value of property when fully operational and stable. Calculated by dividing the stabilized net operating income (NOI) by the market cap rate. To calculate the stabilized net operating income, subtract the total stabilized expense from the total stabilized revenue, which are based on how you will operate the property. Determine the stabilized revenue by performing a rental comp analysis. Stabilized expenses are a little harder to calculate, but base them on the historical expenses and then run those numbers by your broker and property manager to confirm.

Deferred Maintenance: The cost to cure all deferred maintenance, including interior and exterior renovations/updates.

Stabilized Expense Loss: The amount of money the project will lose during that time (i.e. rental losses).

Contingency: A percentage of the deferred maintenance budget (10% to 15%) to cover unexpected maintenance issues.

Equity Fee: The amount of equity you want to earn based on your repositioning efforts

Other Expenses: The other expenses, including delinquent taxes, acquisition fees, closing costs, operating account fund.

@Chris Ready I put in an offer but unfortunately someone beat me to it. My offer is a back up and the current offer is higher than mine. It's strange though that the property has not closed yet so I feel that I still have a chance if the current offer falls through. 

@Theo Hicks Thanks for the detailed info! Very helpful!

Just to close this out. I did not get the property. It sold for full price with no contingencies. Seller's agent was buyer's agent. Took a couple of extra months to close which was odd but oh well, I'll keep looking. Thanks again!