All Forum Posts by: Account Closed

@Ronda Bogdanovic - Based on the NOI of $15k, the property is offered at a 1.2% cap rate which doesn't make sense. The expenses seem too high and I believe principal and/or interest payments are included in your total expenses. In determining the current value of the property, you'll want to include all expenses related to the operations of the property (administration, marketing, maintenance/repairs, grounds, payroll, management, utilities, insurance, real estate taxes, and reserves). You need to include a management fee whether you manage it or not. Your time is worth something, right? Plus, if you decide at a later date you don't want to manage it, this needs to be built in. If the operating expesnes aren't reasonable, you'll need to make adjustments. Also, make sure to assume a reasonable vacancy rate.

Effective gross income - operating expenses = NOI

Take the NOI and divide it by the asking price. What is the cap rate? Is it reasonable for the area? Does it meet your requirements? Is the price per unit reasonable for an asset of this quality in the area?

Overall, it's tough to tell if this is a good deal based on the limited information.  PM me if you want me to clarify anything. 

Thanks @Brian Adams

@Greg Foster - Are you looking for basic analysis and the nuts and bolts of how to value apartments or higher level stuff?  Either way, I would check out the following:

How to Read a Rent Roll - John Wilhoit, Jr.

The Due Diligence Handbook for Commercial Real Estate - Brian Hennessey

It's a Whole New Business - Gene Trowbridge

The Complete Guide to Buying and Selling Apartment Buildings - Steve Berges

Brian, thanks for the great post!  Did you have a property management company lined up during your conversations with the seller during those two years?  I'm wondering if you consulted them on potential improvements to the operation of the property or if it was just based on your experience?  I feel like having a reputable management company on the front end would also help the lender get comfortable with the deal given the horrible records from the seller.

Although two-bedroom units are ideal in most markets, I think you should dig into the local market to see what's in demand.  Call some local apartment complexes:

-What is the unit mix of these properties?

-What are the vacancy rates of studio and 1BR units?  If high, are there waiting lists?

-Ask the property manager what the level of demand for these units is?

-Ask who's living in these units?  (Students? Residents at local hospitals with 1 year rotations? Young singles? Seniors? Short/long terms? etc.)

You can get a great deal on the property and rehab the property but if the market has a lack of tenants for these units, it won't matter how nice they are.  

I've done a lot of work for new apartment development around the country and studios are falling out of favor with most developers.  Unless you are in an expensive metro area (NYC, SF, DC, LA, etc.), it's likely that the studios won't be the most desirable unit types.  I'm seeing senior housing developer's include three-bedroom units in their new complexes.  Who would have thought?

On the flip side, have you thought about combining some units and making a mix of 1 and 2br units? 

Steven McPherson is correct about valuation of single family homes. For Multifamily properties the income approach is relied on but appraisals will typically include at least two and sometimes all three approaches to value - income, cost, and sales.

*not the best source

I'm not sure if this mentioned...what type of factory is it? I work on market feasibility studies in markets nationwide and these types of towns were hit really hard during the most recent recession. There can be quite a bit of risk with so much reliance on one manufacturer. As someone else mentioned, take what people representing the town say with a grain of salt. The chamber of commerce, economic development, and city officials are going to promote the town and may not give you the whole story. I interview these people but then also compare what they are saying to employment and unemployment data, warn notices, major employment information, etc. in regards to rent data, speak with local property managers and check craigslist and other listing sources. The chamber is probably not the best poverty for this data. Best of luck!

Roy N. Brian Burke Mike Dymski Thank you for your detailed responses. I thought having more sophisticated management would help mitigate some of the risk but it sounds like my track record and experience are the most important qualities to potential investors. I appreciate the time you all took to answer my question.

Mark Mosch thank you for the reply and honest feedback. I would likely try to partner with someone experienced before asking anyone to solely invest in me.