How to Value Multifamily with NOI as Moving Target?

Multi-Family and Apartment Investing
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How to Value Multifamily with NOI as Moving Target?

Brian Kraft
Rental Property Investor · Denver, CO · Member since 2014 · 81 posts · 16 votes

Hey -- I'm keeping my SFR/Duplex buy and hold portfolio and heading into out-of-state multifamily, so I'm still trying to grasp various elements. I'm looking at a property now that has been mis-managed by some adult siblings, who received the building after their parents' death several years ago. The more responsible siblings have even more recently taken over management from the less responsible siblings, as they try to bring things back into order after a rough couple years.

They've provided me some initial number that cover their year until Nov 30, 2017. Based on that, there's a very, very low NOI (again -- poor management). Now, I haven't gotten any numbers from the last 6 months, but based on some conversations -- it's likely that an even more current snapshot of their NOI would prove to be better.

So my question is -- what's the typical approach for arriving at a possible purchase value -- as it relates specifically to capturing the NOI in time, especially if it seems to be changing somewhat rapidly? TIA!

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Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
8y

Generally the T3 is the best indicator of trend and your lender will put most weight on those numbers. Why don't you have the last 6 months of numbers?

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  • Michael Le
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    8y

    Generally the T3 is the best indicator of trend and your lender will put most weight on those numbers. Why don't you have the last 6 months of numbers?

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  • Brian Kraft
    OP
    Rental Property Investor · Denver, CO · Member since 2014 · 81 posts · 16 votes
    8y
    Originally posted by @Michael Le:

    Generally the T3 is the best indicator of trend and your lender will put most weight on those numbers. Why don't you have the last 6 months of numbers?

     Well, that's super helpful -- I will be sure to look at the T3 (I didn't know what that was until you mentioned it and I researched it... learning curve and all). 

    I don't have the last 6 months yet because it's been a chore to get much of anything from them thus far. I mean, they're trying, but they're trying to clean up a mess and it's at their own pace. But, until I started talking to them, all they knew was they wanted to sell, but they hadn't yet prepared a single thing for the sale. They were planning on selling retail, but I found them first and we've started to talk in greater detail. Next I'll be asking for those last 6 months, with a specific eye to the T3. Thanks! 

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  • Alyssa Paros
    Rental Property Investor · Johnstown, PA · Member since 2017 · 71 posts · 42 votes
    8y
    For our triplex, it was all vacant. No statements were provided to us. We had to figure out the value ourselves. The BP calculators are a great resource as well as looking at comparable rents in your area. Aim conservatively and talk to other investors in your area about what their typical returns are. Keep analyzing and, eventually, you’ll know when it’s a good deal. This might not be the deal for you (or it might be!), but if you keep analyzing, you’ll be ready to jump when you find it
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  • Matt Popilek
    Kansas City, MO · Member since 2017 · 144 posts · 148 votes
    8y

    Mismanaged property is pretty much the only thing I buy.  I use generalizations on how I come up with the Future Value, and I use the actual numbers to come up with the current value.  In your negotiation using their numbers to show them why you are offering so low will be helpful.  Know the market is it a 10% cap rate market or a 7% cap rate market or lower? I would make sure they understand you are taking on the burden of fixing up the place, and I would be buying it now before they spent all their time and energy getting it fixed up...The more time and money they spend the more they will expect at the point of sale.   

    I try to offer a price at a cap rate higher than the current market which just means a lower purchase price which I think 99% of people on here would do the same. We are all trying to get a Deal. I am usually offering 12% cap rate or higher on my troubled properties which in turn means future value should be 16% or higher. This gives you leverage to either sell for profit, or refinance for cash out to do another deal. Either way if you buy it at the right price you can come out on top.

    You can be conservative on the future value, and if you buy it right you will still have a great return.

    Expect higher maintenance expense than what is normal. Expect higher turn over than what is normal. That way when you have lower maintenance and turn over you will have a great asset.

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  • Brian Kraft
    OP
    Rental Property Investor · Denver, CO · Member since 2014 · 81 posts · 16 votes
    8y

    Thank you both for the additional input. 

    @Matt Popilek -- curious if you use a certain default percent for maintenance and vacancy when analyzing to account for the higher-than-expected? I've seen some guidelines, but curious what you think is realistic. 

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  • Matt Popilek
    Kansas City, MO · Member since 2017 · 144 posts · 148 votes
    8y

    @Brian Kraft depending on age I use 50% to 55% on total cost to gross rent that is my rough in number. Then based on what type of renovation work I can work that number back down to 40% if everything will be new.

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  • Jonathan West
    Rental Property Investor · Columbus, OH · Member since 2012 · 16 posts · 7 votes
    8y
    General ideas: A property’s Cap Rate is a function of the NOI and the value A Market cap rate is the cap rate you would expect for a bunch of properties similar to the one you’re buying A market’s cap rate is generally fixed for a short time domain: it can change over the years but generally is fixed over the next few months A property’s NOI can change very fast. Especially when it goes from mis-managed to well-managed or vice versa. If a property is increasing the NOI, the market’s cap rate is fixed and so the property’s value goes up. So in the situation you describe where NOI is effectively zero but could be a lot higher, you have three choices: 1. Value it entirely on existing performance. Good luck, telling an owner breaking even that they should give you the property for free 2. Value it entirely on where you think performance could be under your management. In this case you will be taking on a bunch of risk on the assumption that your performance goals are met 3. Somewhere in between. Your lean to #1 or #2 is a function of your risk profile.
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  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    8y
    Brian Kraft I think what you have to start with is variables that you know: what they rent out for today, property taxes, vacancy for the area, insurance, PM fees, etc. Once you have those in you can take their maintenance, utilities, etc. and adjust them a few different ways to look at how those scenarios impact NOI. Then you can see how those align with a T3, the 2017 numbers, etc.
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  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    How much land is it on? What is current use versus highest and best? What is density allowance with air rights?

    There might be  a play for scraping the building and doing something new if location is good.

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  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    8y

    Get the T-6 and then look closely at the last few months. You also may need to do some projections as well. If you can buy it at a current T-3 4 cap and within 12 months raise rents and collections it may be worth doing. Look at market comps, vacancy rates, etc. It may be wise to hire a MF broker to represent you and advise you. Have them sign an agreement first that they are representing you. 

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  • Brian Kraft
    OP
    Rental Property Investor · Denver, CO · Member since 2014 · 81 posts · 16 votes
    8y

    Thanks for all the input. It sounds like I'm more or less headed in the right direction -- and I always appreciate all the guidance and invaluable little tidbits.

    @Joel Owens -- great question -- it's not been my plan, but it's important to know what's possible on the land, so I will know those details here shortly.

    @Todd Dexheimer - A T3 4 cap wasn't an approach I was familiar with, but I get it. So, I assume that'd be the same as saying you're aiming at 16 purchase caps or higher (while using the most accurate data you have)? While @Matt Popilek said 12 cap or higher. I imagine it's based on your individual tolerances/the specifics of the deal, but is there a rather standard purchase cap rate "rule," a la 70% ARV, etc? I've been somewhat familiar with market cap rates, but the purchase cap rate is a more recent variable for me, that I need to get a better handle on.

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  • Matt Popilek
    Kansas City, MO · Member since 2017 · 144 posts · 148 votes
    8y

    @Brian Kraft - I think the cap rate you purchase at is significantly just your method.  I think you have to come up with the % that makes most sense to you, and be willing to adjust if you have a really good opportunity come your way.  I never say never!

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  • Account Closed
    Specialist · Houston, TX · Member since 2016 · 68 posts · 41 votes
    8y

    I would push to get the last 6 months of financial data from the current owner. I assume you plan to leverage the property. If so, your lender will require this information, especially the trailing 3-6 months. 

    Everyone's strategy is different, but personally I do not like pricing in the value add. I would go strictly by the actuals to arrive at a purchase price. Think of it this way... It is hard to justify paying for something that is not there. In my mind, if the owner wants you to pay for the value add, they should take the time and effort to raise the income of the property accordingly. Realistically, competition seems to work its way around my first statement in a hot market cycle.

    Regardless, before determining a purchase value, I would suggest determining your investment performance criteria. What stabilized cash on cash return do you expect to see? How much would you need to invest to achieve your value add target? etc, etc. Using these numbers you can arrive at your strike price. 

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