All Forum Posts by: James Dickens

@Leland S. I'm new at this but I agree with you those number just don't work when you calculate it out. Not sure what you came up with but just using rough figures I have the offer price at just over 200K? After some assumptions (vacancy, expenses, capital reserves and debt service if you are not paying all cash) shows about 14k cashflow per month but only if you could get it at that 200Kish price. 

Using the 528k price it shows you would be in the hole about 5K first year with the same assumptions. 

Those are my numbers anyway. Your numbers may very. 

@Bjorn Ahlblad LOL that line made my day "Pro Forma is Latin by the way, it means ‘I had to fill in something’."

And yea I get that the numbers will be somewhat inflated because they are trying to sell and get the most they can for it. I guess I'm still not over the shock at how far off a lot of them are. The closest I got to my numbers matching up with the listings was a Trailer Park listed in Montana (I think) where I was within about 20K of asking. 

Thanks for the reply!

This post is a study in numbers intended to help newer members to talk about and understand the numbers on a Multi-Family deal.

I have been working on understanding the numbers on a deal while putting together a template for a Sample Deal Plan. Although I think my template and numbers (excel sheet) are pretty good it still may need some adjustment. With that here are some numbers on a Mutli-Family listing that I would like to post to compare what I see vs what is listed. Think of this as me wanting to make an offer and wanting to know what the deal is worth to me vs asking price. Hope that all makes sense.

The numbers for the property are taken directly from the Offering Memorandum look like this:

Now one of the confusing aspects of this document is based on Potential Rental Income. That PRI of $530,100 first year compared with the actual last year income is a difference of $175,011. To me that sounds like a big if and I could see some investors getting caught up on this number as fact instead of fiction. I’m not saying it couldn’t happen but I think the price you pay should be based on actual numbers and not potential. Would you agree?

Another note here is that they also run the gross expenses against this fictional number and add in Asphalt Repairs, Payroll and Management fee. Just something to be aware of because that adds according to their estimate about $32k in upcoming fees. 

Now for the cap rate. When I run the numbers not using any Vacancy Rate % I get 7.24%. If I add in a 10% Vacancy Rate I get 6.02%. 

With that out of the way and using the numbers above, I get this as a result.

NOI $218,321

Cap Rate 7.53

NOI * Cap Rate = $1,643,957

That is a difference of $1,256,043 or 57% of the asking price.

So is it typical to run into numbers that differ so greatly?

I’m sure there is a number somewhere in between that is a happy medium but when you start this far apart is it even worth it trying to make this a deal?

If I run the numbers using a 10% Vacancy Rate and then 50% expenses/ROI after that my number is even worse at $1,248,171. (Using this number makes the cap rate 13.28%)

This also gives a first year COC return of 33.52% (assuming a 5%, 20 Year with 25% down). This is vs a 6.46% COC return when I run the same calculation with the figures they listed in the statement.

Sorry this is so long but I am really trying to understand it or see how well I understand it. After running preliminary numbers I would most likely pass on this deal and move on to the next one. I do know however there are caveats that I did not cover such as location, population growth and Jobs but just looking at raw numbers it appears that what the seller wants and what the buyer would need to make this a good deal are pretty far apart.

I would love to hear anyone’s thoughts on this and hopefully, any discussion that follows becomes a learning experience for all.

@Jeff Kehl I had 2 numbers there like @Jeremy F. pointed out and it was as much a study for me in the numbers than anything. To some extent I'm not 100% sure of my numbers so figured I would toss them out there and see what discussions would be had. I think he will know whats best as it is his deal and he knows the area and the numbers and it sounds like he has a good handle on all of it. 

One thing, and again as Jeremy pointed out 50% in a lot of cases will be high for expenses and if you have solid numbers to go by you are better off using those. The 50% is more for quick analysis or so it is being said by some of the Youtube/buy my book crowd. I find though that in most of the cases that I have looked at (Looking at listing sites like Loopnet and Zillow) if you use the 50% NOI to calculate the asking price you will be pretty far off the asking price number. Once I start looking at actual broker deals I'm sure the numbers will fall into place a bit better.

@Debra Chepkemoi From one newbie to another I would say the best thing to do once you have decided on Muli-Family is to look for people talking mainly about that subject. There is a lot of clutter out there. Look here on BP for Blog Posts from the Muli-Family guys and follow them so you know when they post new content. A couple of books I would recommend to start with are the 2 from Ken McElroy - The ABC's of Real Estate Investing and then the Advanced Guide to Real Estate Investing. Those both helped me focus a bit more on what content and information I needed to look for. Currently, I am reading @Matt Faircloth book which you can get here on BP which is called Raising Private Capital. I would, however, say it's best to understand some of the basics before jumping into this. I can tell I am going to have to go through it a few times myself.  

But the original cup of coffee disclaimer still stands and if anyone has any better or more seasoned advice please feel free to give it. 

@Jeremy F. ,

Ok this and 50 cents will get you a cup of coffee so take it for what it's worth. I have not done any deals yet but have been looking a lot at Multi-Family and crunching a lot of numbers. 

In general, I have seen some advice to go with 50% as your NOI after you take your gross - your Vacancy and to use 10% vacancy as a rule of thumb. Your numbers are just a bit different so wanted to see what I came up with to see how different they are.

If I read this right

Gross Income Reported is $81900

Vacancy 5%

GIR-Vac @ 5% is $77805

NOI $55805

From what I can calculate that works out to a 9.71% cap rate

Which puts the est Property Value at $541,867 

That's not too far off which is good.

With the 50% method and using 10% Vacancy Rate, it drops the value down to $357,862

Now again my math may be off but I think that you should be somewhere between those 2 numbers on price and of course that will depend on a lot of other factors and how conservative or aggressive you want to be with your numbers. 

Congrats @Tony Castronovo ! sounds like a great learning experience. Would love to see any numbers on the deal you would be willing to share. I am educating myself currently in the hope that someday soon I too can do what you just did. 

I have been looking in this area for Multi-Family, but also Trailer Parks and Self Storage as well. Greenville, Columbia, Charleston areas in SC and Charlotte, Raleigh Durham and Coastal NC. And also looking in the 10 + unit range. 

@Ryan Picco I say great plan! Although not written down it is much like what has been bouncing around in my head. When I talk about what I want to do I get some of the same reaction about starting smaller and learning that way but to me, it's about scale. I want to focus on the obstacles that are in the way of my goal and that goal is much like yours :)

@Steven Pike Welcome aboard and Welcome to Acadiana! Always good to have more Health Care Professionals in the area. There is a local BP meeting which will be great for you to attend. Here is the link https://www.meetup.com/BPACADIANA/

I would say it would be well worth it to take your agent to lunch and pick her brain. She makes her living on making connections and if she can't help you she will know someone who can. Just let her know you are interested in investing in real estate and you value her input on who would be the best to work with. If she is the one then she will tell you, and if not she should be more then willing to connect you with someone. 

I'm finding in my research (I'm new at this as well) that Real Estate is a Relationship business and building relationships seem to be one of the key tenents outside of the actual numbers that you have to focus on. 

Awesome News! Thanks Mindy and Thanks BP :)