Hello fellow investors, I am relitively new to the investing business but have been in and around real estate for many years. I want to purchase an apartment building that is 20 units or more. I have found and looked at over 150 properties on the internet and none of them will even come close to cashflowing based on the current rents. I have found that many properties are way over priced. I have been using the 50/50 method where you take the gross rents multiplied by 50% subrtract $100 per unit for profit and then figure the present value of the building. What I have been finding is that most buildings are overpriced by 200k-700k and on up. What has your experience been in this arena? Do you just start blasting out offers to see which ones bite? Or is it more or less a numbers game the more you look at the better chance in finding a property that is priced correctly? Also when I do find a deal do you know of any consultants I can run the numbers passed? If I am sticking my neck out on the line I want to make sure that I am right. Any help that you could provide I would greatly appreciate it. Thanks

Sorry I can’t really help you as I am also a new investor who has been looking at apartment complexes and mini warehouses. I am also finding them overpriced. and hard to cash flow. I don’t understand your 50/50 senario to figure value. Could you explain this method to me?

Thanks

Char

Hey Char,

The following is what I do to quickley figure the value of an income producing property. Lets say the gross rents for the month is 20K. Take 20K multiplied by 50%. Now the 50% will represent all expenses that you will incur ie. maint, vacancy rate, uncollected rents. So 20k multiplied by 50% equals $10,000. Lets say the building your looking at is a 48 unit building and you expect $100 profit per unit each month. That would be $4,800 per month. Subtract the $10,000 from your profit of $4,800 and you get $5,200 . That is the max payment you can make to the bank in order for the property to cash flow at $100 per unit. Using a financial calculater we can now find out what the present value of the building should be worth. Financed for 20yrs at 6.5% interest at payment of $5,200 I get a PV of $697,450. This is what I figure to be the value of the bulding but most people have them for sale at well over the value that I calculated. That is the problem that I am having, trying to find a building that is worth what the seller is asking.

Thanks so much for this info. As I said before I am having the same problem so I guess we just make offers and see what happens. Like, what do we have to lose making offers.

Thanks again

Char

Dpm,

You calculation is missing the downpayment. Present Value of $697,450 would be the loan amount. If you were to put 20% down, that mean the property value will be a $871,812. Typically, 20% is what banks will want you to put down for an apartment. And if you were to finance it for 30 years, you could use $822,696 as your loan amount and still make your $4,800 a month in cash flow

Hope this makes sense, as I am too pretty new to the multi-family units. I have a few rental homes and looking to transition into 5 to 10 units properties.

IG

Yes you are correct. NO REAL ESTATE IS PROFFITABLE AT THE LIST PRICE. If I look at 100 propertys I will take the 10 cheapest and work the numbers on them and will find most are around 6% or 7% cap rate and are about 60k to 70k per door. For me to buy them I need about a 10% cap rate and the price per door to be around 30k to 35k. For example if the list price is 1 million I need to buy it at 600k or 60% of the sticker price or 40% in back of book.

I would get to know several realtors and take them for a tour of the wonderfull word of mathmatics to show them the reason for makeing offers at 50% percent discount to the asking price. Most realtors do know that real estate is not profitable unless you buy at a steep discount therefore if you just call them up out of the blue and say I want to buy BUT it has to be proffitable and cash flow they will start laughing and hang up. Or they will explain to you that it does not matter what you pay because its real estate and everyone knows that if you just own real estate you will automatically become rich , rich , rich

As far as a consultant I find the best consultants are your lenders. Commercial lenders that is. Think about it ,…who is sticking there neck out more you who might be putting 20% down or the lender who is putting down 80%. And who has funded more propertys you or your lenders. When I was just starting out I found what I thought were good deals until my lender pointed out some things I did not see. As a matter of fact if you have a deal you think is great but you shopped it to 10 banks and no one wants to touch it does that tell you something???

Where should one look to find discounted muti-family properties so that they will cash flow?

The deals on the internet ARE overpriced. Most brokers will list them at PROFORMA prices which means what the property COULD cash flow. No lender will loan on this basis.

I usually use a max loan formula based on NOI and would be happy to discuss via PM or email.

You hardly ever find them you have to create them. You have to make many offers and negotiate heavily to purchase a property that is profitable at the time you purchase it. Most any property will be proffitable if you wate long enough after purchase by letting inflation do the work.

If you are trying to use the cap rate formula to determine value, your process is flawed. The formulas to use are

Value = NOI / (Desired Cap rate)

NOI = Scheduled Rent Income - Operating Expenses

If there are 20 units and the average rent is $500 per month, then the annual scheduled rental income is $120K. If you use the 50% rule of thumb to estimate your operating expenses, then your Net Operating Income (NOI) is $60K.

Divide the NOI by your desired cap rate to determine the property’s value (to you). If your desired cap rate is 10%, then the value of this property to you is $600K.

If you need financing to purchase this property, the commercial loan officer will not allow you to have annual debt service greater than $48K (or $4K per month). If we assume that your rate is prime plus one amortized over 20 years, then the maximum loan this property will support is about $606,100. Since your maximum purchase price is $600K and the lender will require you to have 20% down, the loan officer will only give you a $480K loan to buy this property which limits your debt service to $3508 per month – resulting in a pre-tax cash flow of $1492 per month ($74.60 per door).