Can you wholesale Occupied Multifamily Units???

Question

I know that you can wholesale any property if the price is right but my question is, how do I got about wholesaling a 4 unit building if it's fully occupied and there aren't many repairs needed?

I know the rents for each apartment and the NOI for the building as a whole. I would like to know how can I make this attractive to an investor in order for me to assign this property and make a profit.

Account Closed · Answer

All good questions and answers... But before you waste your time, is the seller motivated?  Fully occupied and no repairs doesn't spell motivated normally.  There could be an external reason for motivation, but I'd make sure before wasting time.

Nathan Emmert · Answer

Use a NOI at 50% of GOI... price it at a 10 CAP Rate and you'd attract investors.

Start playing games where NOI is 70 - 80% of GOI... have a CAP at 6 or 7 and you're looking for a sucker.

Also, put together a solid package, do the work for the investors.  What are the rents and expenses, taxes, dwelling insurance... what "should" the rents be, have comps printed out, can the taxes be challenged, etc...  Give them a full package they can vet instead of having to fully create themselves.

David Beard · Answer

You should definitely try to determine as much as possible about the seller's circumstances, and what business interests or other things are going on, aside from this property.  Research what other properties they own, always check if property taxes were paid timely on their properties (on the assessor's site), look for signs of financial distress or life circumstances driving the need for a quick sale (divorce, probate, etc.).

I bought several properties from a bankruptcy situation.  The properties were tenanted and mildly profitable (the owner had large loans and so the debt service wiped out most of the cash flow).  The bankruptcy related to the borrower's primary business.  But this was nonetheless a forced sale situation, and so the properties were heavily discounted.  So there are numerous circumstances giving rise to motivated sellers. (duh!)

Mike Nelson · Answer

Well from talking to the seller he is pretty wealthy he currently owns a convenient store and he wants to sell everything and move to costa rico where he can get 10% on his CDs. After talking to him for a while he told be that he owned two more multifamily apartments (all 4 units) and that he would like to keep them but he doesn't want to manage them outside of the US and he doesn't trust a management company.

He is willing to work with me because he doesn't want to pay the agent fee if he sells through a realtor. I'm trying to figure a way to make this work but he want's close to market value for all three.

Karen Morison · Answer

Mike,
If you are going to be doing a lot of wholesaling of commercial properties, you might want to look at a software package called ProAPOD.  Just type it in Google and you'll be able to find it. It allows you to type in the property particulars and it will help you and potential buyers evaluate the property but more importantly, it will pull the data together into a very nice-looking, professional package. In fact, it is what many licensed brokers use to present their listings to potential buyers.  There are three levels of it, and the prices are not bad for what you are getting. Check it out.  A great tool for wholesalers or anyone who plans to use it to sell their own properties (like me)!
Good luck,
Karen

Dan Koch · Answer

Make sure in your package you tell your perspective buyers about the tenant history if your seller tells you. Long term, new tenants, how long the leases are for.

Also is it market rent or section 8? Is there a potential for improvements allowing the future owner to raise rents???

Also talk about any capital improvements that have been performed. i.e. systems, roof, etc.

David Beard · Answer

Nathan, nice suggestion, but sellers never include vacancy, maint, and capex.  They let the buyer plug in whatever they want, as they are assumptions.  The buyer is presumably not stupid.  Most turn key sellers these days advertise zero for all of these items.  I'm with you on the validity of the 50% guideline, but you will be at a competitive disadvantage.

Many large turn key sellers justify using zero because they're giving you a first year guarantee of the NOI.  Does that sound reasonable, to ignore these items in years 2 through 30, WHEN MOST PROBLEMS ARE LIKELY TO ATISE?  Of course not, but most of these big "reputable" companies do it .

Nathan Emmert · Answer

Market CAP Rates will vary a bit from region to region for sure, but a good return on investment is sort of set.

GOI is Gross Operating Income.  Simply what the market rents are for the set ups you have multiplied by the numbers of units in the building multiplied by 12 to get the yearly total.  If there are other revenue sources (parking spaces, storage lockers, coin laundry, etc) you would add that in as well.

From there you can figure 50% expenses to get your NOI.

Your NOI divided by your purchase price is your CAP Rate.

What you'll usually see is someone saying they're gross rents are $1,000 so their GOI is $48,000 for the Quadplex.

Their property taxes are $3,000, Dwelling Insurance is $800, Sewer/Garbage is $4,000 so their expenses are $7,800.

They will claim a NOI of $48,000 - $7,800 = $40,200 and then calculate a CAP Rate off that.

This is a garbage calculation.  It ignores vacant unit, clean up and marketing between tenants, eviction costs, damage, routine maintenance like the roof, hot water heaters, appliances, lawn care, snow removal, etc etc etc etc that are all real costs whether on an annual or some other recurring basis.

In most places, if you can offer an investor a property with little deferred maintenance that is generating rents at 2% of purchase price, they are going to jump all over it.  If you're a wholesaler, obviously you need to get an even better deal.

Mike Nelson · Answer

Nathan - how do I go about calculating the GOI? Also, doesn't the CAP Rate far from area to area?

Can you wholesale Occupied Multifamily Units???

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