Creative real estate I see a lot of problems here, first let's completely rebuild rent rolls and expenses including reserves on paper because I see problems with your presentation.
Use Rent O Meter (This data is pulled from MLS Rental / Lease Data) and see what average median rents are for these units, my guess is that either rents are low or like you stated the property is xx percent rented or vacant. The numbers as presented display a $265 per month rental rate!
Make sure you adjust gross potential income for a vacancy factor before projecting a income number!
Put together and verify all the expenses, compare numbers to actual costs of similar type units in your target market, ask for financials from your agent on similar apartment properties for sale.
Make sure you create reserves for: A. Long term replacement B. Appliance replacement C. Remodeling / Updating D. Short Term Repairs / Maintenance.
Expenses and reserves are equal to 50 percent of your adjusted gross income. Debt service and positive cash flow equal 50 percent. (50 / 50 Rule)
An 11 Cap Rate is a class C property and should be between 30 and 40 years old, in good condition with moderate deferred maintenance.
I think income should be even more than the Gross Scheduled income you refer to!
Let us know what you find out? What is the unit mix? Bachelor, 1, 2, 3 or 4 bedroom units?
Obviously it appears current owner is asking retail even though income does not support it!
First I would check the vacancy factor for this area of Georgia as I believe Georgia's average is about 10%, Atlanta upwards of 15% and if I remember correctly only properties that are newer built after 2004 have vacancy factors of like 8.1% on average.
I don’t want you to disregard what was presented to you but I want you to forensic analyze the numbers, both rent rolls and expenses as sellers have been known to fudge the numbers. And yes Commercial property is valued based on income / expense so no you would not necessarily offer at the sellers asking price, but rather at the indication of value.
Forensic analyze basically means you rebuild the numbers one set the way it is today and one set the way it should operate with rents at market value! At $450 and $650 respectively the property will probable be worth about what this seller is asking.
The possible gross rents before vacancy adjustment is $94,800 and when you take out 10% it is $85,320 divided by 2 equals $42,660 for expenses and $42,660 for debt service and positive cash flow! This property should be valued with good management and good screening for tenants at about $400k with a 10.66 cap rate!
Your number is close as I come up with a value at $226,000 and one of the big problems the current owner has is he presented his agent expenses which are really only 24% of current income but not a number a new commercial property lender will except and loan money against. The $175k difference may very well be to much to overcome.
The property is actually producing 56.5% of it’s earning capacity!
You could try a $225k offer but don’t be surprised if it’s rejected as it’s really difficult to change someone’s mind especially after his agent is obviously supporting this $400k number!