All Forum Posts by: Account Closed

Assuming that this is a 5+ property, this is pretty simple if you want to do a discounted cash flow analysis. Do some research and figure out conservative rents in your area. Determine a time frame in which you believe you can reasonably fix and lease up the units. Bake this into the cash flows and go from there. 

I have had very good luck getting in touch directly with owners of multifamily assets, but it has been very difficult carving out a deal. I believe it is because these owners typically are more knowledgeable about real estate and would rather go through a broker to achieve full value. In some cases, I have had owners back out of a contract and go to a broker. 

That is not always the case and sometimes they do bite. I would include an LOI with the letter, but be prepared to spend a large amount of time negotiating terms.

Let us know how it goes. Seems interesting. 

I'm a huge nerd for this type of question, but everyone here hit the nail on the head. 

The dirty secret of IRR is that it is implicitly tied to the assumptions on cash flow. The assumptions that are baked into the analysis are the meaningful piece of the puzzle. Make sure you check each one very closely.

The even dirtier secret of IRR is that it really doesn't mean much without an understanding of the risk premium associated with the asset. As an example, a 10% IRR would have different meanings for a fully stabilized class B 100 unit asset vs. a 30 unit class D full rehab project.

Hey Bruce, 

One way to add this into your valuation would be to take a reasonable quote and include it as a capEx expenditure at year 4 or 5 in the cycle. Make sure you bump it a bit for inflation in the calculation. 

In general, over the cycle of the investment the roof will likely have to be replaced on most MF properties. When you walk down the property, I would make note of all capEx expenditures that are likely to occur and bake them into the analysis. 

Let us know how it goes.

- JA

You should absolutely make sure all costs are factored into the NOI. Property taxes are included in the valuation and will very likely increase after purchasing the property. I have seen this increase calculated in different ways. You can go with MAI guidelines, which would likely show a 25% increase. I typically take them at 70% of the purchase price in my underwriting.

In general, it looks like the owner is using a 60% expense loading which seems reasonable if all the expenses were included. Without knowing all of the expenses, the location, and the property build it is hard to tell you about the CAP rate.

Good luck! Sounds like you are on to something. 

I have used Reonomy and CoStar. I personally found that Reonomy was much more accurate on the ownership information side. I believe Reonomy collects and aggregates data differently than CoStar. Reonomy is also cheaper than CoStar, but keep in mind they limit the number of properties you can pull per month. 

The problem I see with this is the price... This looks like a C class property w/ radiant ceiling heat and it is being sold at a 6.3% CAP. One value add opportunity you might have is to implement some sort of RUBs for the heat, but you would still have to maintain everything.

Maybe if you have some sort of other large value add opportunity this could be a knockout deal, but I would personally pass. Seems like a small return for a potential large headache. 

Let us know what you decide! Not saying I havent been wrong before.

Hello Mohammed, 

Using an IRR calculation is the right approach, but keep in mind that new development projects are more risky and should therefore demand a higher IRR.

Technically the payback period is an actual mathematical calculation that is used to help validate a project's feasibility. When you say a 10 year period, I am assuming you mean a 10 year period for your IRR calculation. This doesn't seem to be too unreasonable, especially if you secure debt with a 10 year balloon payment. One suggestion is to run your calculations with several different holding periods to help get a better idea of how the investment could perform.

In your IRR calcs make sure you are using reasonable assumptions. It is probably unwise to assume the value of your property will skyrocket in todays market for a commercial property.

One other note is to check into permitting. You mention a house currently stands on this lot. A 6-plex is a commercial asset and you may need to evaluate zoning requirements. 

Good luck! Let us know what happens. Sounds like a cool project. 

I would take a close look at the market and see what the supply and rent characteristics look like for each type of build. After gathering that data, start running a cost analysis that shows the total installed cost of each type of asset. You can do a conceptual level cost-benefit with this data. 

I would additionally think about the exit on a property like this from an investors point of view.... what are the characteristics of the other supply in the market. Will you be competing heavily against single family homes? If so, a town home style may be more attractive. Does the market have room for a lower rent product? If so, maybe an apartment is more attractive. 

Unless you have explicit experience managing a properties, I do not recommend managing this yourself. 

This is a tricky situation. Holden seems rural, which makes me suspect that there may not be many great PMs in the area. Your property is small so larger PM firms may not find incentive to expend resources. 

Obviously, the first step will be to fire the PM company. It looks like you have some real equity in the property. If this still aren't working out, you might consider selling.