Multifam property analysis: Is this a good deal?

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Immanuel Sibero · Answer

@Shweta Patel

Looks like you're dealing with a mobile home park. If you haven't already, I would do a search on mobile home park right here on Biggerpockets as there are valuation and other issues unique to mobile home parks. You will see there are a few investors here on Biggerpockets that are very experienced in MHP. I would reach out to them.

@Michael Kistner

A value add strategy that you described is actually increasing NOI (i.e. Net Operating Income), not CAP rate. Cap Rate is determined by the market, so an investors can not influence cap rate. Increasing NOI can be achieved by increasing revenue or decreasing expenses or both.

Cheers... Immanuel

Aaron Olsen · Answer

@Sheta Patel

Feel free to message me directly.  I have a mobile home park quick deal analyzer and full analyzer.  I am happy to help however I can.

Best,

Aaron Olsen

Shweta Patel · Answer

Thank you every one. I appreciate the feed back.

Immanuel Sibero · Answer

@Michael Kistner

That's a unique way of looking at it. Maybe the phrase "increasing cap rate" in your post really means increasing the "operating yield" of the property, then yes I agree. Operating yield is a measure of NOI and NOI has a direct relationship with value.

I wasn't really commenting on the mechanics of using the cap rate formula which has been beaten to death on here. Was just commenting on the idea that ".. you can increase your CAP rate and drive the value.." in your original post which suggests that when cap rate goes up value goes up.

The relationship between cap rate and value is actually one of inverse. If cap rate increases value goes down. Here are some references with quotes suggesting the inverse relationship between cap rate and value.

https://homeguides.sfgate.com/using-capitalization...

"..the higher the cap rate, the lower the property’s value"

http://people.stern.nyu.edu/adamodar/New_Home_Page...

"The higher the cap rate, the lower the price."

https://en.wikipedia.org/wiki/Capitalization_rate

"A comparatively higher cap rate for a property would indicate greater risk associated with the investment (decreasing demand for the product, and the corresponding value), and a comparatively lower cap rate for a property might indicate less risk (increased demand for the product)"

https://www.divestopedia.com/definition/4920/capit...

"..the cap rate and the value of the property are inversely related."

http://www.ivycommercial.com/caprate.html

"The cap rate has an inverse relationship to value"

We have veered off a little bit from the original topic, so I'll leave it at this.

Cheers... Immanuel

Michael Kistner · Answer

@Immanuel Sibero

If the average cap rate for a market like California is 2-3% and you increase the NOI, which increases the cap rate to say 6-7% for this example, you can now increase your asking price to what a 2-3% cap rate would be because that’s the going rate for that market.

Immanuel Sibero · Answer

@Michael Kistner

"...increase the cap rate which should increase the value."

Increase in cap rates does not increase value, it's the opposite actually. California has seen prices/values going through the roof, but cap rates have been compressing, haven't they? What is the cap rate in CA now? 2 or 3?

Cheers... Immanuel

Michael Kistner · Answer

@Immanuel Sibero

NOI/Purchase Price = CAP Rate

Current NOI - $47,926

Purchase Price - $525,000

Cap Rate 9.1%

If she increases the NOI by raising rents or decreasing expenses she’ll increase the cap rate which should increase the value. You’d still need the demand.

Michael Kistner · Answer

@Shweta Patel

From a numbers stand point I'd continue looking at it. The ARV should be higher if you're going to be renovating it.

Have you requested the rent roll? If so where are they compared to market rents?

How much would it cost to renovate it and what would you be able to increase rents to? Just to see if it'd be worth it, possibly increase the CAP rate if it's 5 units or more.

Can you lower your expenses compared to the previous seller? Again, trying to see if you can increase your CAP rate and drive the value up if it's 5 units or more.

How's the surrounding area?

These are just some of the initial questions I ask myself when looking at MF's. Good luck, I hope it works out!

Multifam property analysis: Is this a good deal?

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